ESG Scores and Reporting and why they will force-multiply corporate growth

As predicted by many experts, ESG is rapidly going mainstream and becoming the new bottom line. This is happening because ESG considerations have become top priority both for corporate leaders as well as for the regulators. Additionally, stakeholder’s activism is putting increased pressure on both the businesses and the politicians to take actions on sustainability as well as social inclusion and job creations. As ESG becomes a more formal way to do business, so does the way we measure and report companies' efforts and actions that affect the environment and society. These actions are starting to include reporting mechanisms, disclosures and scoring indexes which are being developed by ESG scores provided, and which will in the medium term better advise investment decisions potentially reducing risk considerably.

What is the ESG score and why should we pay attention?

I like to look at the ESG score as a rank from 1-100 that qualifies a company's sustainability, ethics, and social impact. The score takes into account from environmental impacts (carbon emission or reduction, water use, risk avoidance, waste etc) to how businesses treat their employees and create jobs among vulnerable communities to best practices in terms of gender inclusion in the boardroom. This score becomes a way to also measure how risky these companies are in terms of investment and the capital markets are increasingly using these scores to decide whether to invest in a type of asset. In current market conditions, a good ESG which makes a company attractive from an investment starting point, is 75 or higher. Conversely a score lower than 60 points raises concerns for the investors. While so far ESG reporting and disclosure has been for the most part a voluntary process, since 2021 it has become a best practice and in 2022 it will become compulsory or expected in the EU (policy driven) and in the US (business and capital market driven).

ESG good reporting correlates with better corporate performance as well as with a healthier, safer, and more balanced corporate environment. Every corporation interested in long term growth should integrate ESG in their business model and start systematically thinking about ways to improve their ESG scoring as this will directly improve their bottom line.

Examples of ESG indicators for companies to start calculating their scores can be as follow:

a) Environmental: Carbon emission, energy use, water intensity of business operations

b) Social: Job creation and training particularly for vulnerable communities, employee’s satisfaction rate (calculated through anonymous surveys), gender inclusion, safety, and general health standard promotion

c) Governance: Diversity in terms of gender and ethnicity within the board, balanced compensation across the entire company, corporate accountability, and transparency

Why should all companies start to measure and report their ESG footprint?

There is abundant evidence that those corporations that measure their ESG impacts, are performing better than those that are not, both operationally as well as financially as witnessed by the higher performance of ESG stocks during the covid 19 crisis. Furthermore, once companies are aware of their ESG score, they typically are in a better position to act and improve their performance. This can then be used as a marketing and positioning strategy while avoiding any type of Greenwashing.

No matter how big or small your company is, start working on a simple reporting mechanism that will allow you to better understand how you contribute or not to a better environment, society, and board. This will help shift the needle into a better global environment, a more inclusive society and a more balanced decision-making process. Ultimately improving your ESG standard will save you money, make you more attractive to investors and strengthen your brand vis-a-vis the consumer. Time to act!