How do you measure ESG?
The stakes are high for a company’s ESG performance
Asset managers (and anyone accounting for risk) need to assess a company’s long term potential. In addition to a thorough financial analysis they want to see a strong ESG score.
That’s because it demonstrates that a company is managing its ESG risks, which is a good indication of future potential and investment longevity.
ESG calculation: who and what?
Specialist companies evaluate and score ESG. Each has developed their own specific criteria and will use a wide range of data, algorithms and risk assessment to inform their final rating.
- Environment requires examination of the metrics for carbon emissions and waste (electronic or physical) as well as water usage, energy usage and vulnerability to climate change.
- Social takes into account the standards applied to labour in the supply chain (safety and management), gender pay ratio, CEO pay ratio, employee turnover, child labour, product quality and consumer care.
- Governance includes business ethics, tax transparency, board diversity, anti-corruption, ESG reporting and disclosure practices. Executive compensation is also noted.
An ESG rating also considers opportunities. For social ESG, this means a close examination of how the company invests in the wider community; its communication efforts; if it delivers or helps with access to healthcare; and even provision of financial opportunities for its workers.
ESG scoring: what’s good… and what’s bad?
A company will usually receive one of four ratings: excellent, good, average or bad.
Scores are reckoned out of a maximum of 100: over 70 is excellent and less than 50 is poor.
A company must demonstrate an overall low impact on the planet and its people.
There’s no point in being excellent in one category if you neglect the others.
Does a good ESG score really matter?
Investors, consumers and employees will feel positive about a high ESG score as it means an alignment to their own values, as well as reduced future financial risk.
A low score is associated with pollution, poverty, lack of safety, poor health, negative publicity and even litigation.
The bottom line is that people don’t want to lose money, but nor do they want to be associated with a bad ESG label.
Are ESG scores reliable – and should we bother?
ESG disclosures are not yet universal, nor are the grading criteria subject to a set of rules. However, to ignore the impact of ESG (either as a company or an investor) would be putting your head in the sand.
Setting targets and looking at internal practice now will benefit your perceived and measured ESG and be evidence that you are preparing for change. Companies refusing to engage risk receiving damaging publicity and being unable to catch up and compete within their sector.
Where can I find out more?
The big names in ESG scoring include MSCI ESG Research, Thomson Reuters, ESG Research Data and Moody’s Investors Service. Check out Rise IQ’s resources page for links to articles and papers.
It sounds complicated
It is, and it isn’t. No doubt there will be evolution over time in how ESG data is gathered, shared and evaluated. Today it is a fact that if a company seriously considers sustainability and ESG it will be positive for its investors, employees and the planet. That makes it is a vital future component of business management at the highest level.