Sustainability makes your organization a more attractive prospect for investors. Increasingly, that means producing some kind of Environmental, Social and Governance report, but simply having an ESG program and providing an annual report isn’t always enough.
Beyond documenting individual measures, companies need to show progress in their efforts to reduce their impact and manage risks year over year.
Moreover, with multiple companies to compare and contrast, and hundreds of ESG reports to read and digest, investors need a simple and objective means of weighing the outcome of these efforts across businesses and even across industries.
An ESG score provides a shorthand way of making these risk-based decisions, offering an at-a-glance picture of how your organization is making progress over time. But how is your score determined and what is a “good” score?
Let’s find out.
what are ESG scores?
Designed to condense a wealth of information into a single figure, an ESG score is a means of effectively comparing risk across an investment portfolio, or between potential investments.
In order to give investors confidence that the scores are neutral and quantitative, the scores are set by third party investment research companies, ultimately providing a big-picture view of a company’s operations, its risks, and its ability to manage them.
Despite the efforts to maintain impartiality, however, ESG scores have received some criticism because there is no standardized way of allocating points, making it difficult to know exactly how they were determined.
how are ESG scores calculated?
In order to determine ESG scores, performance and risk is assessed using ESG metrics that can vary by company and industry, and also by the organization doing the rating.
For example, a manufacturer’s ESG score might prioritize factors like water conservation and energy usage, while a real estate investment firm’s score might weigh factors like transparency in leadership and community engagement more heavily. This approach ensures the score is appropriate for the industry and its risks, resulting in quantifiable progress.
Becoming a sustainable business is not a one-size-fits-all undertaking. Many organizations will tout their sustainability accomplishments by reaching for low-hanging fruit or unquantifiable feel-good initiatives, without making any significant changes to their riskiest or most hazardous operations.
For this reason, an ESG score should also take into a consideration the balance between the presence of risk versus a company’s ability to manage it.
As an example, a company that uses a highly regulated and hazardous chemical in its production may be seen as higher risk, but if it has a strong track record of environmental and health and safety protection, it may receive a higher ESG score. On the other hand, a company that has no chemical concerns in its operation, but makes no effort to reduce vehicle emissions from its fleet, may receive a lower score.
In some cases, the rating organization may also allocate scores based on their own values or priorities. This means one score might place greater emphasis on preserving biodiversity or reducing waste generation, while another might more heavily favor human rights and data privacy protection.
what is a “good” ESG score?
In essence, a good score is one that shows a minimum amount of risk.
As an example, Morningstar uses a numerical index on a scale of 0 to 100 for its ESG scores whereby a score of between 0 and 10 demonstrates negligible risk, while a score of 30 to 40 represents a high level of risk.
By comparison, other rating services may use alphabetic ratings such as:
- AAA and AA – Industry leaders going above and beyond to manage their ESG risks
- A, BBB and BB – These companies have a mixed or unexceptional track record in managing their ESG risks
- B and CCC – These companies are considered laggards who are at high risk of failure or exposure in their ESG program
Ultimately the lower the risk, the more desirable the company or fund is as an investment opportunity. Although a low risk ESG score is rarely the only determining factor, investors building an ESG-based portfolio will often use these scores as part of a larger set of criteria to make investment decisions, weighing the ESG risks against the potential for financial return.
Sustainability makes your organization a more attractive prospect for investors. Increasingly, that means producing some kind of Environmental, Social and Governance report, but simply having an ESG program and providing an annual report isn’t always enough.
Beyond documenting individual measures, companies need to show progress in their efforts to reduce their impact and manage risks year over year.
Moreover, with multiple companies to compare and contrast, and hundreds of ESG reports to read and digest, investors need a simple and objective means of weighing the outcome of these efforts across businesses and even across industries.
An ESG score provides a shorthand way of making these risk-based decisions, offering an at-a-glance picture of how your organization is making progress over time. But how is your score determined and what is a “good” score?
Let’s find out.
what are ESG scores?
Designed to condense a wealth of information into a single figure, an ESG score is a means of effectively comparing risk across an investment portfolio, or between potential investments.
In order to give investors confidence that the scores are neutral and quantitative, the scores are set by third party investment research companies, ultimately providing a big-picture view of a company’s operations, its risks, and its ability to manage them.
Despite the efforts to maintain impartiality, however, ESG scores have received some criticism because there is no standardized way of allocating points, making it difficult to know exactly how they were determined.
how are ESG scores calculated?
In order to determine ESG scores, performance and risk is assessed using ESG metrics that can vary by company and industry, and also by the organization doing the rating.
For example, a manufacturer’s ESG score might prioritize factors like water conservation and energy usage, while a real estate investment firm’s score might weigh factors like transparency in leadership and community engagement more heavily. This approach ensures the score is appropriate for the industry and its risks, resulting in quantifiable progress.
Becoming a sustainable business is not a one-size-fits-all undertaking. Many organizations will tout their sustainability accomplishments by reaching for low-hanging fruit or unquantifiable feel-good initiatives, without making any significant changes to their riskiest or most hazardous operations.
For this reason, an ESG score should also take into a consideration the balance between the presence of risk versus a company’s ability to manage it.
As an example, a company that uses a highly regulated and hazardous chemical in its production may be seen as higher risk, but if it has a strong track record of environmental and health and safety protection, it may receive a higher ESG score. On the other hand, a company that has no chemical concerns in its operation, but makes no effort to reduce vehicle emissions from its fleet, may receive a lower score.
In some cases, the rating organization may also allocate scores based on their own values or priorities. This means one score might place greater emphasis on preserving biodiversity or reducing waste generation, while another might more heavily favor human rights and data privacy protection.
what is a “good” ESG score?
In essence, a good score is one that shows a minimum amount of risk.
As an example, Morningstar uses a numerical index on a scale of 0 to 100 for its ESG scores whereby a score of between 0 and 10 demonstrates negligible risk, while a score of 30 to 40 represents a high level of risk.
By comparison, other rating services may use alphabetic ratings such as:
- AAA and AA – Industry leaders going above and beyond to manage their ESG risks
- A, BBB and BB – These companies have a mixed or unexceptional track record in managing their ESG risks
- B and CCC – These companies are considered laggards who are at high risk of failure or exposure in their ESG program
Ultimately the lower the risk, the more desirable the company or fund is as an investment opportunity. Although a low risk ESG score is rarely the only determining factor, investors building an ESG-based portfolio will often use these scores as part of a larger set of criteria to make investment decisions, weighing the ESG risks against the potential for financial return.
improving your ESG score
The starting point for any ESG score is to have a robust and well-documented ESG program in place. To learn more about ESG reporting, visit our comprehensive guide: What is ESG Reporting.
In order to ensure your organization gets the best score possible, you’ll need to demonstrate that you can measure and manage risks year-on-year, across your organization.
The AMCS Sustainability Platform can help you do just that, ensuring you can document your progress in real time, to track and achieve your ESG goals.
To find out how AMCS can help you improve your ESG score and attract investment, speak with one of our experts today.