Football stadium representing the scoring in ESG

What is an ESG Score?

ESG stands for Environmental, Social and Governance. These are the 3 factors that an ESG score is based on, and it’s a way of measuring the sustainability of a company. It takes into account everything from their environmental impact to how they treat their employees in order to establish if they’re meeting best practices in these areas. The result of this score is then used by investors when deciding whether or not to invest in a certain company’s shares. In addition, as more companies begin incorporating ESGs into their business plans due to pressure from investors, some have seen improved performance as well as increased stock prices at the time of IPO (initial public offering). This has been attributed both to investor demand for sustainable investments and the fact that ESGs can lower the cost of doing business for a company, such as reducing waste and energy costs. An ESG score ranges from 0-100, with 100 being the highest possible score. Anything below 50 is considered a poor score, while anything above 70 would be considered a good score. An outline if you need to learn how to write a report.

What are the benefits of a good ESG score?

In addition to a higher stock price, a good ESG can also lead to increased benefits for employees and a healthier company. It has been seen that an increase in an ESG score correlates with increases in innovation, productivity and profitability. This is due to the fact that companies with a good ESG have more engaged employees who are willing to take more risks and innovate. In addition to this, there are benefits for the environment as well. As companies improve their ESGs, they’ll be able to reduce their resource consumption and waste levels which will result in a healthier planet.

What are the effects of a poor ESG score?

Companies that have a poor ESG score are seen as some of the worst companies for the environment, society and governance. For example, some companies with bad ESG scores pollute local waterways leading to issues such as higher numbers of people suffering from cancer, due to the chemicals from these companies getting into drinking water. In addition to this, poor ESGs lead to increased poverty levels in areas where these companies are located, while also leading to decreased employee morale and motivation.

Who uses ESG ratings?

ESG ratings are used by investors when looking at potential investments to determine whether or not they’ll be able to get a good return on their investment. However, if the company has an extremely low ESG score (below 50), this is seen as creating too much risk for the investor and can lead to them choosing not to invest in that particular company. This is because of all of the problems associated with poor ESGs.

ESG ratings are also used by companies themselves to determine which areas they should improve in order to have a better score overall. This is because the company will see higher profits if it invests in departments with low ESG scores, while reducing any risks associated with poor ESGs. This could mean that the company would come up with new recycling programs or spend more time and money on improving their environmental impact.

ESG ratings can also be used by governments, with some countries requiring companies to have an average of at least 50 before they’re allowed to operate within that country due to the number of issues associated with poor ESGs.

What is the score based on?

The score is based on ESG factors which include environmental factors like greenhouse gas emissions, waste production and energy consumption. It can also take into account how companies are addressing climate change by reducing their environmental impact or by investing in renewable energy sources. The score encompasses social factors like employee satisfaction, diversity initiatives and business ethics standards. Finally, it looks at governance issues such as executive pay, transparency policies and shareholder rights.

  • Environmental factors: These include a company’s carbon emissions, energy consumption and waste production.
  • Social factors: These include diversity of management, talent retention and employee satisfaction rates.
  • Governance factors: These include board diversity, executive compensation packages, accountability standards and corporate culture.

Who calculates the score?

ESGs are typically calculated by third-party companies who specialize in the field. There are a number of companies including MSCI, Sustainalytics and ISS that provide ESG scores for thousands of companies, each using their own methodology to calculate scores.

For example: MSCI uses a quantitative score based on GRI/SRI guidelines as well as a qualitative evaluation, while ISS has a team of experts who assess data points based on indicators drawn from the most current publicly available information.

What factors do they consider?

Factors considered depend on the methodology used, but most companies look at things like carbon emissions, energy consumption and waste production as it relates to company operations. They also take into account supplier assessments, employee diversity/discrimination, supplier diversity, pay ratios and executive compensation.

What does a good score look like?

Anything above 70 is considered a good score. This score indicates that the company is doing quite well in terms of ESG factors. That they are working in sustainable ways with an eye on the future. Examples of companies with a high score are Unilever and Allianz.

What does a bad score look like?

Anything below 50 is considered bad, and is likely to be associated with some major negative impacts on the environment and society in general. This could include issues such as deforestation and increased poverty levels in areas where these companies are located. Some examples of companies with a lower score are Sasol and Anglo American.

What does no score look like?

There are some companies that prefer not to disclose their scores publicly, or at all. It is because they believe that ESGs can change too quickly for them to keep track of it on an annual basis. There is also some concern that the more information you disclose, the easier it becomes for your competition to catch up with you in terms of ESGs, which could end up hurting you in the long run.

How does this affect the share price?

ESG scores have been known to impact share prices, however not always directly. It depends on how much of a difference there is between the current score and the score the investors would like to see. It has also been known for companies whose ESG scores are below the average (50) to see their share prices increase with time as they improve in that department, while those who are above the average tend to see their share price decrease over time.

Which industries are most affected by ESG scores?

Some companies have stated that they’re willing to pay a premium for them because environmental, social and governance factors are becoming increasingly important to large investors. High scoring industries include technology and healthcare. Low scoring industries include finance and oil & gas.

6 elements that are used to calculate an ESG score

An ESG score generally involves a number of different factors, including:

  1. Revealing the organisation’s environmental footprint (through their use of energy and raw materials) and any positive initiatives they might have to reduce or offset this. It will include other factors like how much waste they produce and recycling initiatives.
  2. Calculating how much the company is spending on things such as social welfare and charitable donations. These elements matter because they’re a sign that the company is willing to be generous and invest in communities. Examining how much of a priority internal promotions are for an organisation. This factor might seem unrelated, but it’s important because organisations who prioritise diversity tend to have more positive relationships with their employees and therefore receive better scores.
  3. Asking the company to disclose information on their employees, including working hours, living wages and any gender disparities. This also include the Board of Directors. Governance factors are important because it shows that an organization is investing in diversity on a leadership level.
  4. Comparing the company’s environmental policy to relevant laws and regulations, including global guidelines like the OECD Guidelines for Multinational Enterprises. The aim of this factor is to encourage companies to follow best practices even if they’re not legally obliged to do so.
  5. Comparing their policies on bribery and corruption against relevant laws and regulations. It also includes whether or not they’ve been involved in any controversies related to these types of activities.
  6. Undertaking a review of how transparent the organisation is, including what information they disclose on their website and social media. This factor helps instil trust between companies and investors by increasing transparency.

There are hundreds, if not, thousands of variables used when calculating a real ESG. The above are just a few, to get you thinking in the right direction.

How have ESG scores been used historically?

The first ESG scorecard was created in 1999 by Innovest, a research firm. In 2012, Bloomberg published an index of the 100 most sustainable companies worldwide based on their ESG score. The index has since been discontinued but there are many other examples of how ESGs have been used to evaluate businesses through different types of comparisons.

What’s the future of ESG scores?

With the advent of the pandemic exposing our vulnerabilities, it is quite obvious that humanity is a bit of a pickle. With an increase in Billion dollar weather events our effects on the climate can no longer be ignored. ESGs are now increasingly popular with investors who are looking for sustainable investments. But prior to the pandemic, a 2017 study found that 63% of respondents had increased their investments in companies with high ESG ratings, and 44% were willing to pay a premium for this type of investment. It’s likely that the prevalence of sustainable investing will continue to increase.

What do ESG scores mean for businesses?

Because companies that have a higher overall score receive more interest from investors, it means that they’re going to have the ability to raise capital easier and at a lower cost of capital than their less-sustainable counterparts. It also means that they’re going to be able to hire people with a lower risk of litigation when it comes to environmental, social and governance issues. Other effects might be a positive relationship with stakeholders, a more favourable company image and a lower likelihood of government intervention. All of these factors can have a positive effect on a company’s business performance.

What is the cost of increasing an ESG score?

The costs associated with increasing an ESG score are numerous, but they’re also necessary to ensure that best practices are being followed. For example, if there’s a lack of diversity in the workplace, employees may feel left out or uncomfortable. This can lead to low morale which can then trickle into productivity and profitability. Companies need to consider how their choices affect the people who work for them. They also need to consider the environment and whether or not their current practices are harming it in any way. We often hear about companies who are spending 10’s of millions through litigation, penalties and court proceedings. What if they just did the right thing in the first place? Is litigation a sustainable business model?

What do ESG scores mean for investors?

Investors in sustainable companies are likely going to see a smaller investment return, but what they’ll gain in terms of peace of mind is well worth it. A company that has a low environmental impact and treats their employees well will be less likely to see major scandals, making your investment much safer.

Are there any limitations to ESG scores?

There are a few things worth noting when using ESG scores as an investor. The first is that they don’t take into account the long term. A company may have a low score for social practices, but it could be because they’re in a growing phase and will improve over time. Another issue with ESG scores is that they can change drastically from year to year or month to month, depending on what the scorecard says is most important at the moment. This makes it difficult to compare scores between companies.

4 different types of ESG scores

There are 4 main types of ESG scorecards

  1. social
  2. environmental
  3. governance
  4. sustainability

Each one measures a different aspect of a company’s business practices. The most commonly used is the governance score because it assesses the internal and external factors that affect a company. Next would be the environmental ESG score which looks at energy consumption, usage of chemicals and waste management. The last two are rarely used as they’re more complicated to measure.

What is a ‘Good’ ESG Score?

A Good ESG score is one that meets best practices in each category. For example, an environmental score will take into account energy consumption, usage of chemicals and waste management. A good ESG score would be one that has a low impact on the environment.

What is a ‘Bad’ ESG Score?

A bad ESG score is one where best practices are not being followed in an area. For example, a social scorecard would take into account diversity in the workplace and employees that feel accepted and appreciated. A bad ESG score would be one where employees do not feel comfortable or have been treated poorly.

What is an ‘Average’ ESG Score?

An average ESG score is what many companies produce because they aren’t purposefully reducing their environmental impact and aren’t really thinking about the people who work for them. These scores are acceptable, but not ideal.

What is an ‘Excellent’ ESG Score?

An excellent ESG score would be one where best practices are being followed in all areas of the scorecard. For example, a governance score would look at internal and external factors. An excellent score would be one where the company has little to no problems internally or externally.

What is a ‘Horrific’ ESG Score?

An horrific score would be one where best practices are not being followed in all areas of the scorecard, especially an environmental or social one. For example, an environmental score would look at energy consumption, usage of chemicals and waste management. A horrific score would be one where the company had a high negative impact on the environment or are causing major issues with their employees internally or externally.

Who sets the ESG score?

ESG scores vary depending on which agency is doing the assessment. For example, MSCI uses publicly available information for its scoring process; while Sustainalytics uses data collected by others through interviews and surveys.

What did we learn today?

An ESG score is a rating that’s used to determine how sustainable a company is in the areas of environmental impact, social impact and governance. The result of this score is then used by investors when deciding whether or not to invest in a certain company’s shares. In addition, as more companies begin incorporating ESGs into their business plans due to pressure from investors or governments, they’ll have a higher stock price which will increase profits for the investor. This has been seen in companies that have already begun to make the switch to incorporating ESGs into their strategies. Finally, by improving departments with low ESGs, organizations can see increased morale and motivation along with better performance overall.

Caveats, disclaimers, esg factors and esg data

We have covered many topics in this article and want to be clear that any reference to, or mention of esg ratings, esg score, corporate governance, socially responsible investing, esg performance, esg risks, msci esg research, esg metrics, esg disclosure, msci esg ratings, manage esg risks, asset managers, environmental social and governance, msci esg, dow jones sustainability indices, company’s business relationships, esg solutions, financially material esg issues, esg investing, esg issues, esg disclosures, esg research, esg reports, climate risk, natural resources, sustainability accounting standards board, esg scoring, esg criteria, carbon emissions, company’s esg performance, private companies, industry peers, climate change, corporate reporting, sustainalytics esg research, social and governance esg, corporate disclosure, mutual funds, governance data, risk exposure, public companies, thomson reuters, investment decisions, corporate social responsibility, renewable energy, rating agencies, esg, esg matters, bloomberg equities, environmental protection, sustainable investing, publicly available data, data collection, risk ratings, institutional investors, regulatory disclosures, other stakeholders, fixed income securities, impact investing, missing data, data points, esg risk, governance practices, esg issue, industry group, ratings providers, companies, annual reports, political contributions, company’s performance, board members, industry materiality, corporate knights, environmental impact, investment process or empower investors in the context of this article is purely for informational purposes and not to be misconstrued with investment advice or personal opinion. Thank you for reading, we hope that you found this article useful in your quest to understand ESG.