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.
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.
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:
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:
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 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.
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.
The primary benefit of ESG accounting is that it helps to identify the risks and opportunities facing your company.
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