ESG Score Meaning: Breaking Down The Calculation
ESG (Environmental, Social, and Governance) scoring is becoming increasingly crucial for businesses today. This is primarily due to a shift in investor behavior as they place more emphasis on sustainable and ethical business practices. A study by the Global Sustainable Investment Alliance (GSIA) found that sustainable investing assets reached $35.3 trillion globally in 2020, making up 36% of all professionally managed assets in the five major markets—a percentage that keeps growing, highlighting the increasing importance investors are placing on companies with strong ESG scores.
It’s clear that ESG scoring has moved beyond being just a trend and is now considered an essential factor in assessing a company’s overall value and long-term viability. Today, we’re taking a deep-dive into how ESG scores are calculated and interpreted and what impact this can have on your business.
Understanding ESG Components
ESG scores are used to evaluate a company’s sustainability performance and business ethics. These scores are calculated based on a variety of factors related to a company’s environmental impact, social responsibility, and corporate governance practices:
- Environmental criteria include a company’s energy use, carbon emissions and other pollution, waste management, water usage, and other climate change impacts.
- Social criteria may include employee relations and labor practices, human rights, community engagement, diversity and inclusion policies, product safety, and data protection and privacy.
- Governance criteria include executive compensation, board diversity, shareholder rights, business ethics, and anti-corruption policies.
The ESG Scoring Process
ESG scoring is a multi-step process that involves gathering, analyzing, and rating data relating to each of the three criteria detailed above. Third-party ESG rating agencies – including MSCI ESG Research, Sustainalytics, and Moody’s – oversee the ESG scoring process.Each agency uses its own complex algorithms and methodologies to evaluate companies, making the process more objective and less susceptible to bias. While there’s a general agreement on the ESG factors to consider, the weighting of these factors varies between rating agencies, which leads to differences in the ESG scores provided by different agencies for the same company.
To calculate ESG scores, the rating agency collects data from a wide range of sources, including company reports and disclosures, governmental databases, NGO publications, news outlets, and direct engagement with companies. The quality, consistency, and transparency of the data varies significantly depending on the company and the industry. This makes the process of data verification crucial to ensure the reliability of an organization’s ESG score.
Once the data is collected, it is then analyzed and converted into ratings. Each company is then assigned an overall ESG score, as well as scores for each of the three ESG categories. Although the scales used for ESG ratings vary between different rating agencies, most agencies use a scale that ranges from poor to excellent, which is represented either numerically or alphabetically, such as 1-100 or A-F. A higher rating signifies better ESG performance, indicating that a company is perceived to have lower ESG-related risks and is more likely to be practicing sustainable and ethical business. Companies with higher ESG scores may be seen as more sustainable and responsible, which can lead to increased investor interest, better reputations, and other benefits.
Investors and other stakeholders use ESG scores to evaluate a company’s sustainability performance and to make informed decisions about investing, partnering, or doing business with the company.
An ESG Scoring Example
Let’s say a rating agency gives 50% weight to environmental factors, 30% to social factors, and 20% to governance factors. If a manufacturing company scores 80 out of 100 on environmental factors, 70 on social factors, and 90 on governance factors, the final ESG score would be calculated as follows: (0.5 * 80) + (0.3 * 70) + (0.2 * 90) = 76. While this is a simplification of a process that tends to be much more complex, it helps illustrate the basic approach to ESG score calculation.
The Importance of ESG Scores for Investors and Companies
Investors increasingly consider ESG scores as a critical factor in their decision-making process. High ESG scores often indicate that a company is more likely to be resilient to ESG-related risks, including regulatory changes, social unrest, or environmental disasters. Investors therefore tend to perceive these companies as less risky and more likely to provide sustainable returns. In contrast, low ESG scores can deter investment due to the associated risks.
ESG scores also have a direct impact on a company’s reputation. Companies with high ESG scores tend to be seen as responsible and sustainable, which can enhance their brand image, help attract customers, and improve stakeholder relations. This positive reputation can lead to financial benefits, including increased sales and access to capital.
How to Improve Your ESG Score
Improving your company’s ESG score starts by implementing and demonstrating sustainable and ethical practices. One important step is reducing your environmental footprint by implementing more sustainable business practices. Responsible junk removal and recycling can contribute greatly to improving your ESG score. By partnering with an experienced sustainable recycling vendor like CheckSammy, businesses can carefully track and monitor their waste practices and generate verifiable, unalterable recycling data for use in ESG scoring.
As a company, you can also engage with ESG rating agencies to understand their scoring methodology and identify areas for improvement. It’s important to remember that improving ESG scores isn’t just about “checking the boxes,” but rather about genuine commitment to sustainable and ethical business practices.
Enhancing Your ESG Rating
ESG scores are an important tool for evaluating a company’s sustainability performance, and the better your company’s data is, the easier it is to improve your ESG rating. Start enhancing your ESG performance today by working with CheckSammy to develop a custom recycling program for your company. Contact us today.
See Our Services
Create a custom solution to meet your waste and sustainability goals. Contact us today!
Continue reading
Dive deeper into the CheckSammy Blog by reading one of our posts below
Feeling the Pain of Higher Resident Turnover? Apartment Junk Removal Can Help
If you’re a property manager, you’ve probably had a significant increase in tenant turnover over the last couple of years. So it’s no wonder apartment junk removal may be top of mind for you right now. There are several reasons for this shift. For one, the housing market is on fire right now. In 2020 […]
Read MoreSetting Up a Community E-waste Recycling Program
E-waste is the fastest-growing municipal waste stream according to the EPA, yet e-waste recycling isn’t keeping pace. In fact, only 12.5% of all e-waste is recycled, reports the EPA. Starting a community e-waste recycling program is a terrific way to ensure hazardous e-waste, like lithium-ion batteries, doesn’t end up in your community’s landfill. Creating an […]
Read MoreWaste Management’s Role in the Circular Economy
Establishing a waste management program for your business or community is one of the best ways you can contribute to the circular economy. Here’s everything you need to know about waste management’s role in the circular economy (and how to get involved). What Is the Circular Economy? Our current economic model is all about taking […]
Read More5 Reasons to Consider a Textile Recycling Program for Your Organization
Americans sent more than 17 million tons of textiles to landfills in 2018, a volume that is only increasing every year, reports the Environmental Protection Agency. When you think about the fact that it can take over 200 years for textiles to decompose, it’s easy to grasp how large textile waste’s contribution is to the […]
Read More8 Benefits of Environmentally Friendly Power Washing Services
If you’re into maintaining the curb appeal of your business or home, then you’ve probably heard of pressure washing. Pressure cleaning involves using high-pressure water spray to remove grime, mold, dust, paint, mud, and other junk from objects or surfaces. Many people worry that pressure washing isn’t good for the environment, but this couldn’t be […]
Read MoreWhy Our Customers Love Our Full-Service Junk Removal
If you’re looking for full-service junk removal services, you’ve come to the right place. CheckSammy is a one-stop shop for all your junk removal and sustainability needs. From our affordability, simplicity, and unrivaled turnaround times to our innovative sustainability solutions and patented technology and data, it’s clear why some of North America’s biggest companies choose […]
Read MoreTips for a Stress-Free Move From An Eco-Friendly Junk Removal Company
What does an eco-friendly junk removal company know about moving? Quite a lot, actually. Moving can be an especially chaotic time. You have to pack everything up, get rid of unwanted items, clean your property, load everything up, and move your things to your new location. That doesn’t even include the unpacking and resettling period. […]
Read MoreCollege Junk Removal Tips for Student Move-In Day
As the new school year gears up, colleges across the country are looking for ways to clean up their campuses before the new year begins, and many of them want to do so sustainably. College junk removal isn’t easy, though, especially around move-in week—and when trying to do so sustainably. As students move in and […]
Read More8 Items Hospitality Businesses May Not Know They Can Recycle
One hotel guest produces 2.5 pounds of trash every single day. Just a single hotel room produces around one cubic yard of waste each month, which totals 200 gallons of waste per room every month. Most of this waste goes straight to the landfill, even though research shows that up to 60% of it is […]
Read More