A sure-shot way for a company to win public trust is through the standards it maintains, which are not limited to its products or services. A company’s operations in the environmental, social, and governance (ESG) areas and the impact it creates in these spheres are detailed in its ESG report. This defines the company’s corporate social responsibility in the form of a numerical measure called ESG score that contributes to its reputation.
There are various norms based on which the ESG score is calculated. For an organization to work towards a good ESG score, there needs to be transparency of relevant data and accountability. Using the best project-based ESG scoring tool can help improve the transparency of the relevant data within the organization by making the data accessible to all. It enables the employees to track the ESG progress and identify room for improvement.
ESG Norms
The environmental, social, and governance data of various organizations contain the performance on the following factors which affect the ESG score.
Environmental:This area covers a lot of issues that impact the environment. Some of them are the company’s toxic emissions, waste management, bio-diversity, electronic waste emitted, its method of disposal, water sourcing, carbon emissions, vulnerability to climate change, packaging material used by the company, and waste emitted. It also includes how well they use natural resources and renewable energy, clean technology, their contribution to green building, and more.
It is a good idea to track your organization’s carbon footprint and environmental impact with the help of AI-powered ESG and sustainability management software.
Social:There are some social norms that a company is gauged at when it comes to computing the ESG score. They include the labor standards regarding the supply chain, the product’s safety, and quality. Labor management, the safety of the workers, potential hazards they may face, safety training, financial protection of the customers, executive pay, access to health care and finance, employee engagement, and, majorly, employee satisfaction. ESG factors also include how much the company cares for the community, how it maintains community relations, and how well they follow the regulations and laws.
Governance:Some factors concerning corporate governance include accounting practices, business ethics, strategy and planning, diversity and independence of the governing board, talent management, compliance programs, anti-money-laundering practices, and tax transparency.
How Are ESG Scores Computed?
The Dow Jones Sustainability Indices (DJSI) formulated in 1999 are a group of indices that set the first global sustainability benchmark in the world. It considers various ESG norms to assess corporate behavior. As per information from the World Business Council for Sustainable Development (WBCSD) in 2020, there are more than 600 ESG rankings and more than 4,500 ESG key performance indicators. The ESG score of an organization is a sum product of ratings and weightage on factors like climate change, human rights, diversity, equity, and inclusion (DEI). Measured on a 1 to 100 scale, a score greater than 70 is good, while less than 50 is poor.
Financial institutions and government bodies require companies to provide ESG disclosure and their quarterly and annual reports with all the relevant metrics in a standard format. For this purpose, companies have to select a good reporting framework, some of which are the PRI (Principles for Responsible Investment), GRI (Global Reporting Initiative), and the SASB (Sustainability Accounting Standards Board). The ESG ratings’ providers and stakeholders then review the company disclosures, interview the management, compare the results with other companies and then present an ESG score for the company.
Additionally, companies measure their own ESG scores to measure the actual results against particular issues which may affect their stakeholders like customers, employees, or suppliers. A sturdy ESG reporting software helps companies keep track of their ESG factors and improve their yearly performance on these metrics.
Why Are ESG Scores Relevant?
ESG scores are significant for the reasons listed below.
Investment decisionsFinancial institutions use the ESG score of an organization to judge its credibility for receiving its investment funds. A good ESG score can positively impact the organization’s financial health, and institutional investors perceive it as a ‘sustainable asset.’ Companies with a good ESG score are known to have better anticipation of risk exposure in the future, better identification of opportunities, and structured long-term strategic plans. On the other hand, if a company’s ESG exposure is low with a poor rating, investors may not find it a sustainable investing option, adversely affecting the company’s stock price.
Internal benchmarkingThe ESG scores can enable companies to know their stand compared to their industry peers, knowing which, they could make important decisions to manage ESG risks, leading towards a more sustainable business. You could measure the KPIs (key performance indicators) using ESG data analytics and management software to check for areas where your business could improve to get a better ESG score.
Employee productivityA good ESG score comes by following good ESG practices. ESG practices can help hire and retain reliable human capital as they aim at sustainability, thereby increasing employee productivity.
Cost reduction and growthESG score drives organizations towards growth. As ESG practices aim at overall waste reduction and following environment-friendly methods, the long-term benefits they bring to the organization are vast. They help reduce overall costs, improve performance, provide better returns on investment, and set a brand value for the organization.
Here's Where You Could Turn To...
LOCOMeX provides the best best project-based ESG scoring tool to measure and track your score. We have the best ESG metrics solutions for enterprises and vendors wishing to establish their business as socially responsible, mitigate risks, and improve sustainability. Contact us if you want to know more about our ESG reporting software.
