ESG Scores: What They Are and Why They Matter
In the ever-changing and dynamic world of business, investors and stakeholders often look for new and more effective ways to evaluate the performance of a business.
In the ever-changing and dynamic world of business, investors and stakeholders often look for new and more effective ways to evaluate the performance of a business.
ESG scores have emerged recently as a way to measure a company’s overall impact on society and sustainability. It is a critical metric that evaluates a company’s performance in three areas: Environment, Social and Governance.
Environment (E): How does the company take care of the environment? The “E” in ESG scores measures a business’s impact on the environment. Key factors include waste management, energy efficiency, carbon emissions and overall sustainability.
Social (S): How does the company take care of people? The “S” evaluates a company’s impact on human beings including employees, stakeholders, and community members. Metrics include diversity, equity and inclusion, customer service and engagement, and labor practices.
Governance (G): How is the company governed? The “G” focuses on the company’s internal structures such as its code of conduct, board of directors, executive compensation, transparency, and commitment to ethical business practices.
Collectively, the three pillars of the ESG score provide a holistic measure of a company’s overall impact on the community and society at large and provide a way for investors to evaluate performance outside of financial metrics.
How Are ESG Scores Calculated?
Rating agencies collect data from various sources including financial statements, company disclosures, press releases and through communication directly with the companies themselves. After gathering the relevant information, ratings agencies then use a framework to translate the information to a numerical ESG score.
Why Do ESG Scores Matter?
ESG scores are becoming an increasingly important tool; they provide the public with information for decision-making and can be used by investors, managers, and other stakeholders.
Hiring Talent: Finding and retaining top talent is critical for businesses. Increasingly, people entering the workforce are prioritizing working for companies that align with their values. A high ESG score enhances a company’s ability to attract skilled professionals.
Customer Loyalty: Having a strong ESG profile allows companies to remain competitive by promoting brand loyalty and a positive reputation.
Investor Attraction: A high ESG score acts as a powerful signal to investors that a company is actively managing and integrating ESG factors into its business strategy. It signals that a company is focused not only on short-term profits but long-term value creation.
Risk Mitigation and Regulation Compliance: Governments worldwide are adopting or adapting international ESG guidelines with an emphasis on sustainability. Some governments offer incentives to companies with strong ESG performance.
Understanding ESG scores is a gateway to a future where businesses operate with a purpose beyond profits. Embracing these principles can open doors to fulfilling careers that contribute to a more ethical and sustainable business environment.
Nicole Harris is a full-time tenured accounting and business faculty member at Green River College as well as the Program Director of the Bachelor of Applied Science Degree in Applied Management Program. Nicole graduated from the University of Washington Master of Professional Accounting program with a concentration in taxation. Upon completing her master’s degree, Nicole continued her career in career in public accounting at Sweeney Conrad, LLP. She was later recruited by one of the 4 largest public accounting firms in the nation, KPMG. KPMG offered a much more challenging work environment and diverse clientele. At KPMG, Nicole focused her work on corporate taxation, large partnership compliance work, research and development credit studies and various tax consulting and provision projects.
