What Does an ESG Score Really Say About Your Company?
February 3, 2023
At a glance
- Main takeaway: For many companies, there is no escaping the increasing demand for environmental, social and governance (ESG) transparency — and yet, the lack of standardization for ESG rating agencies has some questioning the relevance of an ESG score.
- Impact on your business: While the wide range of rating frameworks, algorithms and grading scales can present challenges, obtaining an ESG rating can help establish your company’s sustainability strategy.
- Next steps: Aprio’s ESG Practice can help your company identify sustainable opportunities through a materiality assessment to develop your strategic approach to ESG.
Are you ready to start your ESG journey? Contact our team for a complimentary consultation.
The full story:
It’s no secret that each ESG rating agency operates under its own framework, algorithm and grading scale. The disparity among agencies has presented significant challenges for companies, their shareholders and investors.
Many companies (specifically public companies) are feeling the pressure from shareholders and investors to increase the transparency and accountability of their ESG metrics by obtaining an ESG score. That’s not to say that private and small companies do not need to worry about ESG metrics and scoring. In fact, it’s quite the opposite, as the ESG score can be used as an effective tool to attract the attention of large, upstream buyers.
While the SEC launched a Climate and ESG Task Force in 2021 to identify ESG-related misconduct and compliance issues, the ESG sector has yet to see any significant regulations fall under the ESG rating agency umbrella to provide much-needed clarity and help prevent greenwashing.
It’s this lack of standardization that has many companies asking themselves: “What does an ESG score really say about my company?”
In some ways, an ESG score signals to the investment community, employees and customers that your company is dedicating the appropriate time, energy and resources to ESG. Then, you can use your company’s sustainability or corporate social responsibility reports to highlight the areas where you’re doing particularly well and where you’re looking to make improvements.
When it comes to the score itself, it’s important to remember that the first score should be viewed as a benchmark. It reveals where your company is at in this moment in time. Then, next year and the year after that your score hopefully increases further. What you’re really looking for is the trajectory of change, and the key to establish this is by staying consistent, which includes sticking with one rating agency.
Leveraging your ESG metrics to meet investor and shareholder expectations
Part of the challenge for any company or management team is determining where to place their focus. Should your company be concentrating on greenhouse gas emissions; diversity, equity and inclusion (DEI); or executive board composition? The options are vast and can be overwhelming.
Performing a materiality assessment can help your company evaluate and identify the ESG factors that will have the greatest impact on your company and its profitability. What’s unique about a materiality assessment? It connects your financials with long-term sustainability impacts, enabling you and your ESG advisor to build out an effective strategy that supports the ESG factors your company should place an emphasis on first, while also potentially improving your bottom line. Often, the material areas you select will provide the strongest value to your business, thus generating better margins and returns for shareholders’ overtime.
The bottom line
In a perfect world, ESG rating agencies would be relatively standardized. Of course, there would be industry-specific variations, but ultimately each agency’s algorithms and grading scales would produce consistent results.
Aprio’s ESG team can help your company take the first step into sustainable opportunities by performing a materiality assessment to determine your company’s strategic approach to ESG. To learn more about ESG, connect with our team for a complimentary consultation.
Are you ready to start your ESG journey?
Contact our team for a complimentary consultation.
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About the Author
Simeon is the Chief Investment Officer of Aprio Wealth Management and the Director of Aprio Family Office. Simeon brings two decades of professional investing experience in publicly traded and privately held companies, as well as senior-level operating and strategy consulting experiences.
Nicole has more than 25 years of experience helping practice leaders and C-level executives develop solutions to business challenges. She specializes in solution design, market expansion and profitable growth. Nicole is an expert in creatively developing solutions to ensure clients realize their goals. She is a champion for change management, technology adoption, leadership, innovation and problem solving.