Environmental, social, and governance (ESG) scores are used by investors to better understand a company.
The score is less about evaluating the current state of a company but more about predicting its future.
A high ESG score helps companies build up trust with customers and employees, both of whom are increasingly demanding that companies act ethically.
There are many ways to analyze a company’s ESG score. Consider factors such as how the product is manufactured, employees are treated, and communication is handled with stakeholders.
Analyzing and Bettering a Company's ESG score - The 4 Step Process
In order to better a company's ESG score, it's important to know what makes up a good or bad ESG score.
In order to determine this, look at the company's current ESG rating and then compare it against the average rate for similar companies in its industry sector.
If the number is below average, there are a few steps to take to improve upon this number:
1. Ask key questions
- What is the company's ESG score?
- What are the key ESG factors that matter to the business?
- What is the company's ESG policy?
- What is the company's ESG score in each of the key ESG factors?
2. Look at your product
To check if a company is adhering to ESG standards, look at the product as a whole.
This includes its impact on the environment (including the carbon footprint), society and community, economy, and customers.
Each of these can be checked by looking at respective aspects: carbon emissions (greenhouse gas emissions), water usage (energy consumption), waste production (waste disposal), labor practices (workplace safety), and social responsibility, among others.
3. Ask others
To get started, seek information from others. If a company is compliant with ESG factors, it’s time to ask: Are we willing to have our ESG practices audited by a third party? If so, who will conduct the audit and what are their qualifications?
Once there is a list of potential third parties who can assist with the ESG score or strategy implementation (or both), it’s time to find out: Is this person/company qualified and experienced enough to provide these services in addition to being licensed by relevant authorities like ASIC or OCC?
Check if they have an established relationship with other major companies in the industry; this shows that they won't be treating your company different from others when providing audits and reviews.
If yes, and only if yes, then continue moving forward.
The next questions to consider:
What are the requirements for this service provider (e.g., confidentiality)?
And finally, How much does it cost?
4. Use ESG Playbook by Dealroom.net
Grab your copy of the ESG Playbook by DealRoom.net here.
As with any playbook, it's important to note the limitations of this particular one. It was released in May 2022 and is a good starting point for companies that want to check their status against ESG factors.
It's not comprehensive or an audit—for that, you'd need a third party or other advisors who can help you get started on a path toward certification as an environmentally friendly business (or whatever your goal is).
In summary, ESG factors are a great way to make sure a company is on the right track. The first step is to start asking these questions of your company!