By this point, one would need to be living under several rocks to not know about the general push to decarbonize. More broadly, companies are coming under increasing scrutiny for how they conduct their business. This can range from governmental oversight, fines, and regulation, to investors pulling finance because a company does not conduct itself well. ESG scores are the primary method used to assess companies, but what exactly does this number measure who measures it?
The Basics
In 2023, it can be easier to conceptualize an ESG score as precisely that, a score or number that can be tracked, compared, and measured. While this varies from company to company, industry to industry, and even agency to agency, it all starts with data. Since the introduction of scope 3 emissions measuring, nearly everything that even touches a business is codified and assigned a “weight.”
Exactly how a measuring agency decides the weight of something is a complex process, involving time, local regulations, and other data points. Companies are also measured against each other to create a baseline. Then, like a math equation, a final score is generated, combining all the various impacts into a single score. This will generally be a number from 0 to 10’000, though letter grades are also sometimes used, i.e. AAA for the best scores in a sector.
The Environment
The number one piece (or pieces really) of data that agencies look at are currently carbon emissions. This is across all three “scopes” though depending on the industry, there might be other things looked for. Water pressure and waste are common, so the packaging used for most products and the water costs of cooling and food production all feature in the “E” part of ESG. Land and raw material used are also measured, including the impact a company’s operations have on the biosphere. Companies looking to improve this score should focus on green energy and implementing cleaner technology. Clearing up one’s scope 3 emissions is also vital.
The Social Effects
The “S” in ESG mostly revolves around health and safety across the entire value chain. Agencies give good scores when there is positive human capital development, chemical safety, consumer financial protection, privacy, and data security. While the precise measures differ from area to area, employee and stakeholder health is an important element of “S” and is the first place a company should look to improve if needed.
Governance
Governance is “simple” in the sense that it mostly covers employee pay, ownership, and accounting, in regards to tax transparency and general business ethics. Since tax and employment law differ so much from industry to industry and area to area, there is no easy solution to a “poor” governance score. The general advice would be to maintain proper business ethics and avoid mistreating or abusing employees.
The Limitations
The lack of standardization does make it hard to properly assess the precise impacts. Like a test grade in school, there can be a number of non-performance aspects that lead to one score or another. A poorer student might do relatively well because they got lucky on multiple-choice tasks and happened to study on the exact questions in the test. Similarly, a stronger student might be well-prepared, but perhaps didn’t sleep well or forgot to eat lunch. These issues can be somewhat offset by the use of longitudinal data. This can allow companies and regulators alike to keep track of positive and negative long-term developments and more easily identify trends.
The data used tends to be self-reported, which comes with some issues. Companies do want to greenwash themselves and can find methods to skew data, misrepresent some number, or, in the worst cases, outright lie. Methods for transparency and independent auditing need to become more common and established.
What do companies need to remember?
Getting an ESG assessment regularly is an important start. Most companies already comply with this idea. In general, it’s important to have clear and transparent data for everything that measuring agencies care about. Even if the score is generally high, misrepresenting just a small amount of data can have long-lasting reputational costs.
For companies that are looking to improve their scores, there are some risks and opportunities. “E” in particular is under scrutiny and tends to have an initial cost of entry. New technology and renewable energy are not yet as cost-effective as older methods. But this is changing and companies need to be aware of the possibilities out there. Similarly, AI and sustainable energy production are now allowing some companies to save heavily on operation costs while helping them improve their ESG scores across the board.
The Global Summit on Scope 3 Emissions Reduction will bring together key industry experts to learn more about reporting strategies & carbon data management in a small-scale, industry-driven event, on 20-21st April 2023 in Amsterdam, the Netherlands. The two-day, hybrid event features in-depth case studies of supply chain transformation, carbon accounting, and networking breaks dedicated to exchanging insights and expertise on tackling Scope 3 emissions. Visit future-bridge.eu and netzero-events.com or follow us on our social media to track other energy use and decarbonization events.
