Since 1992's Rio Summit in Brazil, which highlighted the strong connection between the environment and development, it has been a race trying to get more corporate organisations to adopt sustainability. Stakeholders, from investors to customers, are particularly emphatic on working with companies or organisations that are sustainable, raising the need for a more quantifiable and accurate rating method. One system of determining this is looking at their ESG risk score.
If you have a company or are a corporate manager, it is important to ensure you get a higher ESG risk score because it comes with multiple benefits. Keep reading to learn more about ESG rating, how it is calculated, and strategies for improving it in your organisation.
What is an ESG Risk Score?
A business or company’s ESG risk score is a rating that assesses how sustainable its operations are. A good environmental, social and governance (ESG) score would compel investors to appreciate the company's efforts in promoting responsible operations and sustainability. The score can be assigned to a company, an individual product, or an investment asset such as a mutual fund or ETF to help interested parties, such as investors, in assessing it.
ESG risk score is calculated by third-party organisations, such as MSCI, which factor in all the operations of companies under consideration to ensure that the picture or rating given to potential investors is accurate. It is because of this that more capital markets, from the Hong Kong Stock Exchange (HKEX) to the London Stock Exchange (LSE), have put additional ESG reporting requirements for better analysis of their operations or performance.
When calculating an ESG risk score, both present and future risks have to be factored in. Again, the ratings might also include certain elements, such as preserving biodiversity or reducing carbon footprint, depending on the corporate business's priorities/ values.
As we are going to see shortly, a good ESG score comes with loads of benefits for your organisation, and it is important to ensure your company integrates sustainability into its operations.
How is ESG Score Calculated?
The process of calculating the ESG risk score involves gathering information about the selected company and applying specific formulas. Again, the organisation used for scoring commitment to sustainability might differ depending on your industry. For example, SASB (Sustainability and Accounting Sustainability Board) works best in scoring companies in the financial sector. Other common ESG risk score calculating firms and frameworks include Global Reporting Initiative (GRI), Thomson Reuters ESG Global Coverage, MSCI, and TCFD.
For purposes of demonstration, we will use MSCI. The scoring organisation collects information that is publicly available about a company to gauge how well it meets all ESG metrics. Therefore, it is prudent to ensure that sustainability-related information/ data, such as ESG reports, previous scores, how different issues are addressed and financial metrics of your company, is available for perusal by the public.
After calculating your company’s ESG risk score, it is compared to industry peers’ ratings as well as other sectors. According to MSCI, your company’s score can range from AAA to CCC. Here is what these ratings mean for your company:
- AAA rating means that your company has a strong focus on ESG issues and is strongly resilient to risks that might come its way.
- BBB rating shows average focus on ESG issues with significant resilience to risks that might fall its way. Often, investors tend to be worried about such companies and prefer holding back their commitment to establish if the risk resilience is improving or declining. Therefore, you had better work hard to move to AAA ESG risk score.
- CCC score is the lowest ESG risk score on the MSCI scale, and it is an indication of poor focus on ESG matters. For example, companies that release a lot of waste into the environment or use unethical practices are considered high-risk entities and get a CCC rating.
The Main Advantages of a Good ESG Risk Score
As a corporate entity, your target should always be reaching the best possible risk score. On the MSCI scale, the targeted ESG risk score should be AAA, which will be very helpful in winning the affection of investors. By simply looking at the score of your company, investors will quickly make the decision to work with your company. Other benefits of getting an impressive ESG score include:
- Helping to strengthen your company’s brand on the market or industry. This might be all that you need to stand out from other companies.
- A good score gives the assurance that the company is making a positive impact towards helping address the challenges facing the planet.
- An excellent ESG performance means that a company has installed good operating strategies. These are likely to come with lower operating costs, especially in the long term.
- Most companies that report outstanding ESG performance also boast of more satisfied and committed staff.
- The process of ESG integration comes with better stakeholder engagement, which means that committed companies also report higher levels of sales and profits.
These are only a few of the long list of benefits that your company should anticipate for opting to operate sustainably. Remember that the process of ESG implementation in a company is guided by principles such as continuity and accuracy, implying that you are sure of more benefits with a continued commitment to sustainability.
The Following Strategies can Help You to Improve the ESG Score
The good thing about ESG risk score is that your company always has room for making improvements. The most important thing is identifying material topics, having goodwill, a plan, and tools for improving the score. So, here are some useful tips to employ to help improve the score.
- Reduce waste production at the source.
- Support the local communities around the areas where your company operates.
- Cut down the company’s carbon footprint.
- Identify initiatives like forest establishments in your country to help ecological resilience.
- Identify disadvantaged communities and help empower them through direct programs or government-initiated activities.
- Support social justice-related initiatives.
The efforts you put towards improving your company’s ESG risk score should be captured, analysed and reported accurately. To note all the details and analyse them with high levels of accuracy, you need the right sustainability management app. The software makes it possible to stay focused and capture all the details for your ESG report. You might also want to consider working with experts in ESG matters to help make the process straightforward.
At Diginex.com, we have the best programs, from diginexESG to diginexLUMEN, which work with companies and businesses of all sizes. Our professionals are also respected all over the world for their expertise and commitment. Contact us now to learn more about ESG risk score, how to improve it, and enjoy all the benefits that come with adopting sustainability in your company.