As the world economy rapidly develops, the public start to value environmental and human rights related issues. In addition to being the driving force of the economy, corporates are also required to fulfill corporate ESG to gain the favor of consumers and investors. And ESG scores are the benchmark for comparing ESG results between corporates.
This article will briefly explain the history and importance of ESG and how ESG scores are measured currently to help corporates obtain higher ESG scores for fine industry competitiveness.
What is ESG?
After the Second World War, the vigorous economy development allowed people to fulfill their basic needs and begin to take heed of the world development. The investors’ desire to improve the world brought about socially responsible investing (SRI). As these growing funds needed clearer indicators to select corporates for investments, in 2004, based on the Global Compact, the United Nations extended the three aspects of environmental, social, and corporate governance as a reference for socially responsible investments, which became the ESG now.
The common ESG indexes include:
- Environmental indexes such as waste disposal, carbon emissions, water use, etc.
- Social indexes such as working environments, community relations, product safety, etc.
- Governing indexes such as financial transparency, internal management, etc.
These indexes help investors specifically measure the efforts of corporates in ESG. Besides enhancing the corporate image, many investors and research reports believe that companies that implement ESG will outperform the industry average in long-term operation and profitability due to their sustainable visions and actions.
What is an ESG Score?
After a corporate implements and disclosures its ESG actions regarding environmental, social, and corporate governance issues, it’d be difficult for the average investors and consumers to compare it with other companies in the same industry.
For example, according to the 2022 ESG reports of mobile manufacturers Apple and Samsung, in 2021, Apple had reduced its carbon emissions by 50% since 2015, achieved pay equality between genders, races and ethnicities in the U.S., and introduced new software made for the disabled. Meanwhile, Samsung recycled 96% of its business waste; its work environment was 100% compliant with the ISO 45001 (Occupational health and safety management systems, OHSMS), and all smelters and refiners in its supply chain were certified with the Responsible Minerals Initiative of the Responsible Minerals Assurance Process, RMAP.
From the ESG actions claimed by the two corporates, it’s hard to tell which corporate has a better ESG performance. To solve the problem of comparability, many third-party agencies use various research methods and standards to give ESG scores to different corporates for the investors’ reference or the ETF index stock selection.
Common ESG score evaluation agencies
At present, there are many ESG evaluation agencies. Each has its own professionals to measure the ESG score of each corporate in different ways. The following is a brief introduction to 4 major ESG evaluation agencies:
Morgan Stanley Capital International, MSCI
The MSCI ESG score evaluates 35 crucial issues based on the corporate’s publicly disclosed ESG reports, government agencies and NGOs such as the World Health Organization, the U.S. Department of Energy, etc. A corporate’s ESG scores are divided into CCC, B, BB, BBB, A, AA and AAA, representing being behind, average or leading in the industry. Multiple ESG-related investment funds follow the MSCI ESG indexes.
For example, with the MSCI rating, Apple achieved BBB in November 2022, and Samsung achieved A in June 2022. Both companies are in the category of technology hardware, storage & peripherals, meaning Samsung outperformed Apple in ESG, which can help investors and consumers support corporates with higher ESG scores.
The S&P’s indexes include the well-known S&P 500 and the Dow Jones Industrial Average. Its ESG score, the S&P DJI ESG Scores, are evaluated by the CSA and internal surveys. The CSA is a questionnaire system based on the GICS, which is given to corporates selected by the S&P DSI (usually large corporates) to answer, accounting for 12.4% of the 11,556 corporates evaluated by the S&P DJI in 2020. The rest was evaluated by the S&P DJI itself. It quantifies corporate ESG as a score of 0-100, and the higher the score, the better the ESG performance.
Owned by Morningstar, Sustainalytics has an ESG index scores of 0-100. The researchers of Sustainalytics analyze corporate information, mainly assessing corporate operational risks. The higher the score represents the higher the risk. A ten-point range represents no risk, low risk, medium risk and high risk, of which more than 40 points mean serious risks. Sustainalytics currently conducts the most ESG evaluation in the world, evaluating 14,000 corporates yearly. If a corporate wishes to evaluate its ESG risks, it may apply to Sustainalytics for an evaluation.
The FTSE mainly provides British stock market indexes, such as the famous FTSE 100, FTSE 250 index, etc. And its ESG index FTSE ESG divides the corporate score into 0-5, the higher the score means the better the ESG performance. Each of the three aspects of E, S, and G has their own 0-5 score. However, its corporate coverage is small, which are mainly large corporates.
B Lab is a non-profit organization in the U.S., which provides B Corp Certifications. After assessing corporate ESG with the BIA and auditing the questionnaire from the corporate and supporting information, it grants an ESG score of 0-200. A score higher than 80 passes the B corporate certification. But this score is only used as the basis for certification and will not be revealed to the public. Corporates may apply for a certification to obtain ESG scores and is not limited by whether other agencies actively investigate its own corporate.
Most 3 meaning of ESG Score
After implementing ESG practices, how does achieving high ESG scores in line with the standards of various ESG score evaluation agencies help corporates? There are three main aspects:
1. Investor preference
According to the biennial report published by the Global Sustainable Investment Alliance (GSIA) in 2021, the global sustainable investment reached US$35.3 trillion in 2020, accounting for more than 35% of the asset under management (AUM), an increase of 15% over 2018. This indicates that investors trust companies with high ESG scores more in terms of value recognition, corporate risk response capabilities, and investment return prospects.
With a publicly offered company as an example, investment agencies select several stocks based on ESG scores, compile ESG indexes based on their proportions and stock prices. And Exchange Traded Funds (ETF) track these indexes for investment, such as tracking the MSCI index. The iShares MSCI USA ESG Select ETF established in 2005 has an investment scale of more than US$3.2 billion (as of January 30, 2023), and has brought a 8.53% annual rate of return to investors since its inception. The iShares ESG Aware MSCI USA ETF, which also tracks the MSCI Index and was established in 2016, has an investment scale of more than US$19.7 billion (as of January 30, 2023) and has generated an annual return of 11.58% for investors since its inception.
Besides the investment of professional investment agencies, many investors will also choose to invest in companies with good corporate images, and the bank investment departments often tend to invest or finance companies with good ESG scores to improve their ESG ratings.
2. Improving corporate image
Implementing ESG may quantify the good environmental, social and corporate governance impact of corporates, attracting investments, human resources and consumers. Achieving high ESG scores allows companies to have objective benchmarks and better ESG performance claims among their peers.
3. Certifications by third-party agencies to increase sustainable operation capabilities
After implementing ESG, corporates should measure their own efforts, mainly reviewing the progress of achieving the goals set in the past and consulting professional advisors or conducting market research, etc. ESG scores can provide the direction for improvement for corporates. And they can also be objectively certified by third-party agencies to understand whether the past ESG results are good compared with other peers.
How are ESG scores rated? Common rating indexes
Each agency evaluates ESG scores differently according to the industry and characteristics of the corporate. And the key issues of each industry are weighted according to the degree of importance. The common scoring indicators based on the 3 pillars of ESG – environmental, social and corporate governance are listed below. Corporates may take heed to the relevant ESG scoring indicators according to their own business and actual ESG scoring items.
ESG Score index 1: Environmental
The environmental score mainly reflects the impact of a corporate on the natural world. Common ESG scoring indicators include
ESG Score index 2: Social
The social score mainly reflects the impact of a corporate on customers, employees and the region. Common ESG scoring indicators include customer satisfaction, customer privacy protection, supply chain management, workplace environment, physical and mental health and career development of employees, community relations, etc.
ESG Score index 3: Governance
The corporate governance score mainly reflects the transparency and internal control capabilities of a corporate in corporate governance. Common ESG scoring indicators include board composition, executive remuneration, whistleblower system, business ethics, etc.
Does my company need an ESG score?
Obtaining an ESG score benefits a corporate greatly. If you own a large corporate, you may communicate with ESG rating agencies to help them make more realistic scores through questionnaires or data. The scores may make your corporate more appealing to investors or even have it included in ESG portfolios, thereby driving up secondary market stock prices.
If your corporate isn’t a large one that ESG rating agencies would actively investigate, you can also apply for ESG evaluations to understand whether your past ESG performance is in line with the latest world trends, assess the corporate’s sustainable operation ability, and obtain certification from third-party agencies to help disclose to shareholders, employees, clients and other stakeholders.
Five steps of obtaining an ESG score
After learning about ESG scores and how they benefit your corporate, would you like to have your corporate evaluated for ESG now? Here are 5 steps to help you learn how to have your corporate evaluated for ESG:
Step 1 for ESG evaluation: Choose the right ESG rating agency
Corporates may choose the suitable ESG rating agency as a reference for future ESG optimization. If you own a large corporate, there may be ESG rating agencies which take the initiative to evaluate ESG scores for you. You may choose the market where you want to exert influence, such as Europe being the FTSE, the U.S. being the MSCI, etc. Refer to the rating agency’s public scoring measures or contact them to learn more about its ESG evaluation basis for your industry.
If your corporate isn’t of a large size, you may choose Sustainalytics to align with the standards of large corporates and measure the ESG risks of your current operations. You may also choose B Lab to measure the corporate’s benefits to the world and join the ecological chain of other corporates with the same aspirations.
Step 2 for ESG evaluation: Finding the corporate key issue
Each corporate has a different scope of business and naturally focuses on different ESG issues. For example, the key ESG issues for the IT manufacturing industry may be renewable energy, e-waste production, water management, human capital development, supply chain and labor, raw material procurement, privacy and data security, product safety and corporate governance, etc. The key ESG issues in the catering industry may be packaging materials, waste, raw materials, water consumption, product safety, labor management, and opportunities to provide nutrition and health, etc. It can be seen that the overlap between the two is less than a half. Only the corporate itself knows which ESG items are related to itself. It may also refer to the industry classification in the ESG disclosure framework or ESG rating agency standards.
Step 3 for ESG evaluation: Relevant data collection
After locating the focus of the corporate’s operations, you may take stock of the item related information, such as confirming the organization’s carbon emissions through the ISO14064 standard, recording monthly water consumption, forming employee remuneration regulations, requiring the supply chain to propose relevant certifications, compiling the list of board members and background checks, etc.
Step 4 for ESG evaluation: Disclose relevant information and produce an ESG report
After collecting the required data, you may prepare an ESG report according to the ESG disclosure framework. The commonly used and credible frameworks include the GRI, SASB, TCFD, CDP, etc. You may choose one or more frameworks for the report. Please see this article for details.
Step 5 for ESG evaluation: Send the data to an ESG rating agency and optimize corporate ESG implementations based on the ESG score
With the ESG data, a corporate may actively provide it to ESG rating agencies to assist them in calculating ESG scores. But it should be noted that some ESG rating agencies such as the MSCI do not accept the data provided by corporates, and corporates only need to disclose it to the public and other institutions such as government regulators and NGOs. After obtaining an ESG score, a corporate may work to improve the items with lower scores.
ESG scores provide comparability of ESG implementations of different corporates in the same industry. It also helps corporates to review their own ESG results with the objective scores from third-party agencies, so that stakeholders can evaluate corporate ESG in the fastest and most intuitive way. Therefore, continuous improvement of ESG scores and achieving industry leadership will be an important endeavor.
Work with Renouvo to improve your ESG score immediately
If the key issues of your industry include carbon emission, packaging materials, business waste, product safety, or supply chain procurement management, Renouvo provides corporate ESG consulting services. With the world-leading technology for low-carbon, bio-based, compostable materials, it tailors suitable solutions for corporates to increase the ESG scores of these items.