Investors passionate about sustainability will always use ESG ratings to evaluate the equities of companies they are targeting before committing their money. More stakeholders, including licensing authorities and partners, are also checking ESG scores to determine how responsible companies are. After learning about the challenges or issues facing the planet, such as global warming, stakeholders are getting a strong urge to make a positive impact, and this starts with picking only the companies that have good sustainability ratings.
For an entrepreneur, manager, or business person, the main questions are, “what is an ESG score?” and “how do you improve your company’s ESG score?” This post is a comprehensive guide to ESG score, outlining what it is, and how it is measured. It also explains the best methods that companies can use to improve their scores.
What is an ESG Score?
ESG score is the measure of a company’s long-term exposure to environmental, social, and governance risks that often get overlooked in the conventional financial analysis. The risks include things such as worker safety, energy efficiency, corporate board composition, staff safety, waste management, and staff satisfaction.
As we are going to see shortly, an ESG score comes with a long list of benefits, but only if your company makes it part of the primary management strategy.
Therefore, do not simply adopt ESG reporting to impress the stakeholders, but as a genuine approach to help improve the sustainability score/ rating and make the world a better home for all.
Benefits of Having a Good ESG Score
A good ESG score comes with a long list of benefits for your company, stakeholders, and entire planet. So, let us list some of these benefits that your company should anticipate.
- ESG rating is used by investors to determine if they should consider investing in your company. So, a good score can help to increase the chances of investors directing their funds to your company.
- Some governments and licensing authorities use ESG ratings to determine whether your company will be allowed to operate in their jurisdictions.
- Provides a snapshot of your company’s working and operational performance.
- A good ESG score is important in helping your company predict future challenges and prepare clear strategies for tackling them.
- An impressive ESG score goes hand in hand with high staff satisfaction, retention, and improved productivity.
- Companies with a good ESG score report higher profitability and success both in the short and long-term.
What Constitutes a Good or Bad ESG Score?
Now that we have highlighted the main benefits that come from using ESG ratings, the next question is, "what constitutes a good ESG score?”
At this point, we must say that there are several scoring organizations that provide the scores for companies. For example, the Dow Jones ESG score is based on risk-related data gathered through an annual sustainability assessment. Then, the company under consideration is rated on a scale of 0-100.
A score of 70 and above is awesome for investment, but anything below 50 should be a red flag that the company's sustainability effort is poor.
Another revered global scale is the MSCI Ratings model, which has been in operation for more than 13 years. It measures a company's management of financially relevant ESG risks and opportunities. Then, it allocates a score, which can be AAA for companies with the best sustainability performance and CCC for the worst performers. If a company is rated BB, it means that its performance is average.
How can Your Company Improve its ESG Score?
The next big thing after answering the question “what is an ESG score?” is how to improve it. No matter what your company’s score is, these four tips can help improve it.
- Make ESG Part of Your ESG Strategy
Stakeholders, especially investors, want to know how organizations are responding to the latest global trends, the methods used to identify ESG risks & opportunities, and, more importantly, the strategy employed to drive long-term success. This is why most stock markets, such as the Hong Kong stock exchange (HKEX) and London Stock Exchange (LSE), have created ESG reporting guidelines for companies to follow. This means that people targeting investing in the listed companies will easily scrutinize their risks and make the right decisions.
The whole idea is to make ESG part of the primary agendas and craft a plan to enhance sustainability. Remember that achieving a high ESG score is a process and cannot happen overnight. You might have a target of achieving carbon neutrality by 2050 in your company ESG plan, but in small bits. For example, 60% of reduction can be achieved in 15 years and the remaining 40% over the remaining period.
- Align to Global Regulatory Frameworks
One of the challenges standing on the path to improved sustainability is the lack of consensus about the reporting standards. However, we are not short of guidelines, and your company can shoot up its ESG score by identifying and using the available frameworks. For example, you can opt to use any of the top three most popular frameworks, including the Task-force on Climate-related Financial Disclosures (TCFD), SAASB, and the Global Reporting Initiative (GRI).
- Follow the ESG Sustainability Reporting Principles
When you adopt an ESG plan, one of the final products is the ESG report. This is what stakeholders will read to know about your sustainability efforts and progress. To avoid the risk of greenwashing, you need to carefully follow the reporting principles. For example, the details you provide should be accurate and verifiable.
If you indicate that the company managed to cut down carbon footprint by, say 50%, can the information or the data involved be verified? If you helped with the process of reforestation, demonstrate the efforts and results. So, what were your company’s goals, and were they achieved?
Other ESG reporting principles include clarity, continuity, materiality, respect for internationally proclaimed human rights, and a precautionary approach to the environment.
- Use ESG Sustainability Reporting Software
Every time that you think of “what is an ESG score?” and “methods of improving it,” it becomes apparent that the whole consideration is all about data. When preparing ESG sustainability reports, you need to collect data concerning your plan, including the goals, resources allocated to implement the strategy, and results over time.
This data is what will be used to prepare the ESG report, but it is never easy.
Because you are dealing with different sets of data, from financial to environmental and social, the right ESG reporting software can help you to interweave everything. The reporting app that you select should also help you to work with the selected ESG framework and adhere to all reporting principles.
As you can see, understanding "what is an ESG score?" is only the first step toward making your company more sustainable. The most important thing is improving the score, and the strategies we have listed in this post can help. You should also work with our experts at Diginex.com for assistance. We also have some of the best ESG apps, from diginexCLIMATE to diginexLUMEN, and diginexESG.
Talk to our experts now for all your company’s ESG needs.
