ESG Scores ~ What are they and how do they benefit businesses?

Across almost every sector, environmental, social, and governance (ESG) is now recognised to be playing a key part in what makes some businesses more successful than others. Companies across the globe take ESG seriously and are applying best practices to make improvements.

Having the scope to manage risks associated with ESG, as well as its opportunities, can help a business to thrive in this competitive world. To understand your businesses ESG liability, it is important that you understand its ESG score and why it is so important.

49% of millennial millionaires make their investments based on social factors! In the future, ESG may become compulsory, so it's time to take note.

Did you know that Companies performing on ESG Practices have:

What is an ESG Score?

An ESG score makes it possible for companies to assess and understand their performance internally and across the wider corporate ecosystem. The score is based on how a company is seen to be performing and behaving when it comes to reporting environmental, social, and governance issues.

There is a clear gap between reality, and what is seen to be happening when it comes to ESG. Although a business may have strong policies in place to deal with the likes of carbon emissions or the reduction of waste, if this information is not readily available in the public domain, it will have no positive impact on its ESG score.

Likely, the stakeholders won’t clearly understand the ESG position of the company if the score is not an actual reflection of how the company is performing. While ESG scores are only a measurement of how certain behaviours are reported, the scores hold value when it comes to identifying gaps between the internal reality and what is perceived externally.

Where a reality gap is seen, it poses a risk, and this makes it especially important for the business to report thoroughly on ESG factors as this will help to create an accurate ESG score.

Why Do You Need an ESG Score?

Essentially, an ESG score is something that can make a business take action. It should shift the focus of stakeholders onto their ESG liability and where opportunities and risks might lie. Furthermore, it will help them to determine how the business is performing against the broader sector.

This could mean that a business might need to take a new approach to corporate strategies as a result of ESG performance. Perhaps, their corporate reporting is more detailed concerning ESG issues to take advantage of the rise in sustainable investing. Maybe they will miss out because they are not doing enough to promote their ESG credentials.

There are a whole number of reasons why a business needs an ESG score beyond understanding its ESG position. A?large increase in ESG investing?could be one of the more significant reasons as investors are looking for portfolios that consist of sustainable assets.

There is a strong link between good performance on material ESG issues and financial performance. ESG scores make it possible for independent and institutional investors to determine which companies are going to deliver good returns.

Asset managers are now seeing a good ESG rating as an indication of healthy profits.

?What are the benefits of a good ESG score?

• A satisfactory ESG profile not only sits well with other stakeholder groups but also employees looking at the environment, social, and governance policies to see if they match with their own values and ethics. Those seeking a new job can look at an ESG score to determine whether companies are right for them. If businesses put focus on scoring well, they could attract the best talent.
• Additionally, campaign groups and NGOs are unlikely to focus on companies that have a high ESG score when looking to expose unsustainable practices.

From an internal perspective, an ESG score that comes from adding weight to ESG liabilities on a broad range of issues, as well as specific factors that relate to its sector, will give businesses the scope to seek out ESG opportunities and potential risks. For those areas where the business achieves a good score, they might equate to factors that underpin its purpose and so, and this will make them more financially viable.

As an example, an airline that reduces its fuel consumption is going to have more of a positive impact than it would for a bank. Similarly, if it gave some of its profits to a homeless shelter, that could sit well with those who do the same thing.

The reality is that an ESG score is not going to have an impact on behaviours whereby people follow crowds. Press releases that relate to environmental activities are not a precursor for successful ESG policies. However, it is important to make sure that ESG credentials are communicated correctly as this will help to close the void between reality and perception.

It is not just the role of the team to ensure that stakeholders understand the ESG position of the company. Essentially, everyone who works for the company becomes an ambassador of the company and its ESG beliefs and goals.

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