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What is an ESG score?
An ESG score is a measurable statement of impact, grading success and challenges within the vast field that is environmental, social and governance.
ESG is an immense topic, but its hold over global investment (around $41 trillion as of this year) means firms will likely have to craft their response to it at some point, whether they like it or not. ESG scores determine whether these responses work. Here’s what you should know about them:
What is an ESG score?
It is an impartial assessment of how your company fares at ESG. It measures two main things; how good you are at ESG and how exposed you are to ESG risk. We can often use the same scores to grade funds and securities too.
A few things you should note:
- Since ESG is so broad, each score will likely refer to one area, like carbon emissions. A score for the entire ESG landscape would be far too general to be meaningful.
- Specific agencies usually calculate ESG scores using specialised expertise. You’ll likely know many of the most prominent agencies already.
- Multiple parties will use ESG scores as a reference, including senior management, boards of directors, investors, consumers and governments.
What areas do ESG scores cover?
They can cover most, if not every, aspect of ESG that stakeholders believe is worth measuring.
Some will be specific to an industry, but many will apply across multiple industries. Examples include emissions, employee satisfaction, labour practices, business ethics and waste management.
How does ESG scoring work?
The bad news is that ESG has no standard rating/scoring system, so several prominent examples monitor different organisations with their own metrics.
Many ESG rating agencies use a scale from 0-100, with better performances scoring higher. However, one of the most popular – provided by MSCI ESG Research – grades on a seven-point scale from CCC (laggard – essentially bad) to AAA (leader – essentially the best).
You can read more about the different scales here.
Where do ESG scores appear?
It’s crucial to remember that ESG scores are increasingly becoming an industry standard, making them more likely to appear alongside companies’ quarterly or annual reports.
In some cases, scores for companies are publicly available. In others, you may have to pay an agency to find your results. The critical thing to remember is that the information is out there and rapidly becoming a must-have for investors’ business decisions.
Why is ESG scoring important?
Your stakeholders use them to determine if your company is worth their while.
Investors and consumers care a lot about ESG nowadays. Investors especially will recognise how much money is invested in the initiative, and they know the breadth of research showing how it results in long-term success.
Ultimately, most will only use ESG scores as part of their process for evaluating a business. But it is an important part, especially in competitive industries. If your company has a poor record in ESG scores (or worse – has never had an ESG score), investors will likely side with a rival business.
Who makes the scores?
There are multiple rating agencies with an established reputation for doing this, so you won’t have to look far if you’re researching this for the first time.
Here are some top examples:
- MSCI ESG Ratings, which has the CCC-AAA scale we have already mentioned.
- Sustainalytics’ ESG Risk Ratings
- Bloomberg ESG Disclosures Scores
- FTSE Russell’s ESG Ratings
- Moody’s ESG Solutions Group
In summary
ESG ratings/scores are an essential communication channel between companies and investors.
They paint investors a unique and accessible picture of a company’s performance in ESG and the risk of ESG blunders. This could well be a crucial factor in investment decisions.
They are not entirely standardised yet, but well-known systems exist.
