A company’s ESG score relates to its environmental and social impact as well as its governance practices. In context, a company’s score can influence the perception of current board members, potential investors, and the general public.
Whether a company is recognized for treating its employees well may seem marginal on a small scale, but when you consider enterprise-level partnerships, mergers and acquisitions, and potential investing, ESG scores are of monumental importance.
An ESG score informs investors, asset managers, financial officers, and a range of stakeholders. An ESG score may be used to gauge past, present, and future success regarding how a brand relates to its industry and competitors. Investors often use ESG scores and reports to “screen” potential investments.
What Does ESG Mean?
To capture its importance, let’s breakdown what ESG means. ESG means environment, social, and governance. Let’s explore each one in a deeper context.
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ESG Reports and Ratings
The environmental portion of an ESG report deals with how a company’s activities impact the environment and animal habitats. For example, companies that emit a significant amount of harmful gases into the environment are increasingly required to publicly report this activity, which may harm relationships with investors, employees, customers, and other stakeholders. Alternatively, companies that embrace “green” initiatives are noted as well, and are increasingly rewarded by the market for these activities
In addition to greenhouse gas emissions,, a companies environmental ESG score is influenced by such factors as water preservation, protection of wildlife habitats, and overall natural resource conservation.
The social portion of ESG involves a companies impact on the people it affects. . Some pressing issues relate to how well employees are treated, including how well wages are spread throughout a company, whether facilities are safe, and benefits related to maternity/paternity leave or medical leave, .
The social portion of ESG score can also refer to charity work, local donations, fundraising, and internal policies related to social movements.It’s important to note that a company is judged not only on internal performance, but on the culture that exists at vendors, suppliers, and joint venture partners.
Lastly, ESG governance gauges the degree to which a company has the right oversight and management structure to ensure that its culture and activity reflect its stated values. Factors that influence givernance scores include Board and audit committee independence and diversity, pay equity, corporate ethics policies, and alignment of compensation with corproate values.
What is an ESG Risk Score?
An ESG Risk Score is one way investors and other stakeholders can quickly view a companies ESG performance and potential risks.
That ESG Risk Score is not just a “soft” number; instead, much like a credit score, it can have hard dollar impacts on borrowing costs, employee recruitment and retention, equity valuations, and business won or lost.
How Are ESG Scores Calculated?
A number of third-parties calculate ESG scores. The Bloomberg ESG Data Service, for example, provides data related to factors such as renewable energy usage, collecting information for over 10,000 public-listed companies.
The Bloomberg scale goes to 100 and draws-in data from other third-party rating agencies. Bloomberg rates companies annually, getting information from sustainability reports, websites, public resources, and direct contact with companies.
Bloomberg claims its data points are associated with over 100 ESG indicators including carbon emissions, supply chain, executive compensation, waste disposal, and diversity . Transparency is also key, as companies will get points taken off for “missing” data.
ESG Scores and Company Impact
How an ESG score impacts the company is subjective and time sensitive. For example, some investors may be more interested in a company’s diversity as compared to its carbon footprint. Conversely, some stakeholders may place carbon emissions of utmost importance as compared to how many sick days granted to employees.
Therefore, ESG scores, while greatly important, need further context in order to truly measure impact. Historically, some investors were willing to overlook negative ESG factors aslong as a company remained profitable. However, this is rarely the case today. Scores are increasingly more practical as environmental, social, and governance issues become more transparent due to the global connectivity of social media ..
If ESG scores need more vindication, in recent years, financial institutions such as Wells Fargo and Goldman Sachs produce annual reports, incentivizing and validating ESG scores and reports.
Why You Need an ESG Program
A number of companies have the wrong perception of ESG scores, viewing only the potentrial risk of loss but ignoring the potential opportunity. ESG scores and reporting can be leveraged as a public relations tool, alerting and attracting potential investors, blue-chip employees and new business at both ethe consumer and B2B levels.
Climate and ESG risk is in many ways similar to other risk factors such as credit, market, or operational losses. As entire supply chains are exposed to the same risk factors, firms that are able to de-risk the supply chain benefit not only internally, but by charging a premium to vendors and customers for this service. With a 20 year history of reducing supply chain risk, Mobius Risk Group looks forward to helping our clients turn ESG risks into ESG opportunities. With any risk, the first step is to measure, and ESG scores provide a sound starting point to begin this process.