An environmental, social, and governance (ESG) score is a score given to a company that assesses its performance on a range of ESG topics. An ESG score allows a company to assess and understand its ESG performances internally and allows the wider external ecosystem to do the same.
An ESG score is based on perceived performance - how a company seems to be performing and how its ESG behaviour is reported. There is of course a gap between the perception that this score is based on and reality when it comes to ESG practices. If a company’s sustainability policies and practices are not in the public domain then they will not impact the company’s ESG score. This gap between perception and reality poses a risk because the accuracy of the ESG score and ESG reputation of a company is contingent on it reporting comprehensively and accurately on ESG practices.
An ESG score, however, allows companies to find and focus on their ESG liabilities, find where their risks and opportunities are and compare their ESG performance to other companies in the same industry. Areas where a business scores highly can present opportunities for further growth and alignment with the business’s overall purpose.
ESG scores can also impact investments in a company. Investors are increasingly looking for environmentally conscious investments and look to ESG scores to determine if companies will potentially offer good returns. This is because strong ESG practices are being increasingly linked to stronger financial performance.
ESG scores can be highly subjective due to the prevalence of different scoring systems. A lack of transparency in the methodologies used to generate these scores makes it difficult for organisations to understand where their scores come from. Scoring systems should be objective, consistent and accurate for ESG scores to actually have valid meaning in the evaluation of a company’s practices.