What is ESG?

There has been massive growth in ESG in the last few years due to the increasing demand for companies and businesses to be more sustainable and reduce their impact on society and the environment.

ESG stands for Environment, Social and Governance and has become a popular way to measure companies’ impact. 

• E (Environment)– can include measuring a company’s scope 1, 2 and 3 carbon emissions, pollution, water use and waste disposal.
• S (Social) – Human rights violations, gender equality, racial diversity, workers’ rights, workers’ safety, the contribution and impact to local communities, supply chain management
• G (Governance) – includes how the company governs itself. Governance factors can consist of the diversity of the board, executive compensation, tax strategy and corruption. 

How is it measured?

Over the last few years, different ESG scoring systems have emerged. Scoring systems vary and differ depending on who is doing the measuring. However, scores are calculated using publicly available data from companies and a methodology to quantify an ESG score.

Companies are scored based on their public reports. These include sustainability disclosure reports, quarterly business reports, diversity and equality reports, corporate governance, executive compensation and how transparent companies are with relevant data.

Unfortunately, there is no global standardisation for measuring ESG, making scores difficult to compare.

Who gives ESG scores?

Financial research companies including MSCI, Bloomberg, ISS and Sustainalytics measure and give ESG scores. 

Each company has a different scoring system, making them difficult to compare. For example:

• MSCI gives a score of AAA (best) to CCC (worst)
• ISS provides scores from A+ (best) to D- (worst)
• Bloomberg ranks ESG from 0 (least transparent) to 100 (most transparent)
• Sustainalytics measures ESG risk to a company from 0 (negligible risk) to 40+ (severe risk).

What are the pros and cons of using ESG to measure sustainability?

The pros;

• The increase in ESG reporting can increase sustainability reporting generally, as companies feel the pressure to keep up with the latest trends. 
• ESG reporting encourages companies to set measurable and actionable targets for improvement
• The stress of getting a good score could persuade companies to act more responsibly.
• What gets measured gets changed. Hopefully, disclosing current sustainability scores will inspire companies to make sure their scores are improving year on year.

The cons;

• The lack of standardisation makes it difficult to compare ESG scores.
• ESG scores are sometimes misleading because the benchmark for scoring depends on who is analysing the data and the methodologies used. So, for example, some companies get excellent ratings for linking their sustainability targets to executive compensation – no matter how rubbish their sustainability targets are!
• A good ESG score does not necessarily equal sustainability. For example, some scores give social or governance factors higher weighting in their scoring methodologies. So companies with a great board composition may have a high score despite having disappointing climate and environmental targets.

Want to learn more about sustainability? Check out my sustainability blog post here.