ESG scoring refers to the process of evaluating and assigning scores or ratings to companies or entities based on their environmental, social, and governance (ESG) performance.
It aims to assess how well organisations manage and address ESG risks and opportunities. ESG scoring provides a quantitative measure that helps investors, stakeholders, and the general public evaluate and compare the sustainability practices and impacts of different entities. Here are key points about ESG scoring:
Evaluation Criteria: ESG scoring typically considers a range of factors within the environmental, social, and governance dimensions. These factors may include carbon emissions, resource management, labor practices, diversity and inclusion, board structure, executive compensation, supply chain management, data security, and more.
Data Sources: ESG scores rely on various sources of information, such as company disclosures, public reports, regulatory filings, third-party data providers, and specialized ESG databases. The availability and quality of data influence the accuracy and comprehensiveness of ESG scoring.
Scoring Methodology: ESG scores are determined using specific methodologies developed by rating agencies or organisations. These methodologies assign weights to different ESG factors based on their materiality and relevance to the industry or sector. The scoring process may involve aggregating individual scores for each factor to arrive at an overall ESG score.
Rating Scales: ESG scores are often presented on rating scales, such as numerical scales (e.g., 1-100) or letter grades (e.g., A-F). Some rating agencies also provide percentile rankings that show how a company's ESG performance compares to its peers within the same industry or sector.
Transparency and Disclosure: ESG scoring relies on the availability of reliable and transparent information from companies. Strong ESG disclosure practices and transparency contribute to higher scores as they enable better assessment of a company's sustainability performance.
Continuous Monitoring: ESG scores are subject to updates and revisions as new data becomes available or as companies improve or change their ESG practices. Rating agencies often review and update scores on a regular basis to reflect the most recent information.
ESG scoring serves as a tool for investors, asset managers, and other stakeholders to evaluate and compare the ESG performance of companies. It helps in identifying leaders and laggards in sustainability practices, informing investment decisions, and promoting transparency and accountability in ESG reporting. However, it's important to consider that ESG scoring methodologies may vary among rating agencies, leading to some variations in scores. Thus, it is advisable to consider multiple sources and understand the underlying methodologies when interpreting and using ESG scores.
Rating Agencies and Indices
ESG rating agencies assess companies and organisations based on their environmental, social, and governance performance. These agencies provide ratings, rankings, and evaluations that help investors, stakeholders, and the general public gauge an entity's sustainability practices.
Here are some prominent ESG rating agencies:
1. MSCI ESG Research: MSCI ESG Research evaluates companies based on various ESG factors and provides ESG ratings and research reports. They assess companies' exposure to ESG risks and opportunities, as well as their management of these factors.
2. Sustainalytics: Sustainalytics is a leading provider of ESG research and ratings. They assess companies' ESG performance across different industries, helping investors make informed decisions and understand ESG risks and impacts.
3. Institutional Shareholder Services (ISS) ESG: ISS ESG provides ESG ratings, data, and analytics. They assess companies' ESG performance and provide insights into their environmental and social impact.
4. CDP (formerly Carbon Disclosure Project): CDP focuses on environmental performance, specifically climate change. They work with companies to measure and disclose their greenhouse gas emissions and water usage, and provide ratings and rankings based on these disclosures.
5. Dow Jones Sustainability Indices (DJSI): DJSI, maintained by S&P Dow Jones Indices, assesses companies' sustainability performance across various industries. They select companies for inclusion in their sustainability indices based on ESG criteria.
6. FTSE Russell ESG Ratings: FTSE Russell provides ESG ratings and indexes that measure companies' ESG performance. They evaluate companies based on various environmental, social, and governance factors.
7. FTSE4Good Index Series: The FTSE4Good Index Series measures the ESG performance of companies based on globally recognized standards. It includes criteria related to environmental sustainability, social responsibility, and corporate governance.
8. Corporate Knights Global 100: The Corporate Knights Global 100 is an index that ranks the world's most sustainable companies. It evaluates companies based on a range of ESG indicators, including resource management, employee diversity, clean revenue, and more.
9. Vigeo Eiris: Vigeo Eiris assesses companies' sustainability performance using their proprietary methodology. They provide ESG ratings, indices, and sustainability assessments to support responsible investment decision-making. These ESG rating agencies play a crucial role in evaluating and benchmarking companies' sustainability practices. Their assessments provide transparency and guidance for investors seeking to align their investments with ESG considerations. It's important to note that each agency may have its own methodology and criteria for evaluating ESG performance, so it's recommended to consider multiple sources when analyzing ESG ratings.
