Effective ESG scoring is the start of a long journey
There has been much discussion and debate around the effectiveness of environmental, social and corporate governance (ESG) scores, with calls for better standardisation and transparency on the procedures around the ranking process.
Recently, S&P Global made headlines by dropping ESG scores from debt ratings, choosing instead to stick to analytical narrative paragraphs in credit rating reports.
For many of our clients at Fire on the Hill, ESG is front of mind and is a growing area of development and innovation as organisations move from a period of intention to action.
Reading this latest news on S&P Global revived debate around the efficacy of ESG scores, and, while not a perfect system, I believe they are an important stepping stone in the journey towards a more sustainability-focused future.
Organisations are under pressure from investors and consumers to provide more transparency around their sustainability plans. As a society, we are also moving on from organisations showing support for sustainability through their words alone.
Today’s businesses are now being held accountable for what they say they are going to do, both internally and externally.
There are weaknesses in ESG scoring, but as we look to decarbonise, these scores will be a vital tool to hold businesses accountable for what they say they are going to do
Many organisations have pledged to meet targets such as net zero.
The likes of PensionDenmark, CDPQ and Allianz have all joined the alliance of net zero asset owners committed to transfer their investment portfolios to become climate neutral by 2050.
Although debate continues around whether these targets will be met in time, continued use of ESG scoring can only be an aid in helping to keep organisations on track.
From a financial and competitive perspective, there are also clear benefits. Organisations with strong ESG ratings and scores may have better access to capital, particularly as this becomes a vital part of investor’s criteria when considering investment decisions.
There can also be an argument for an increase in longevity, as it forces organisations to take a long-term perspective on its practices and make more sustainable choices.
The purpose of these ratings is to identify and assess a company’s exposure to ESG risks. By doing so, companies can then address these risks and potentially reduce the impact.
Beyond financials, these scores can help to create a strong brand and reputation for an organisation – it shows commitment beyond words.
The action behind the intention – trust and transparency are the fundamental pillars for consumer loyalty.
By demonstrating a commitment to ethical and sustainable business practices through ESG scores, it can have a positive impact not only on consumer trust but also employee trust, pride, attraction and retention.
There’s no turning back now…
Organisations’ approach to ESG will continue to evolve.
Will there ever be a full embrace of ESG scores? It is still too early to tell. But there are clear signs that show the benefits for organisations of transparency and data which ESG scores enforce.
Demand for this level of scrutiny by consumers, stakeholders and investors will only continue to grow as we approach key sustainability deadlines, and so I believe we’re only at the start of a long journey.
We do not have to be in a ‘doom loop,’ we have some incredible tools at our disposal, we just have to ask the right questions.