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What is Environmental, Social and Governance (ESG) investing?

The concept of socially responsible investing dates back to the 1960s, when financial institutions began to use social and environmental criteria to identify more responsibilities with whom to invest. However, the more comprehensive concept of ESG was coined in 2005 and has only become mainstream over the past decade.

Today, ESG ratings are used to evaluate a company based on its environmental, social, and governance practices, to provide transparency for investors, customers, and the industry as a whole.

What is ESG’s score rating?

An ESG rating can be broken down into three categories which are typically interconnected:

Environmental score

The Environmental score of an ESG rating deals with factors that affect the natural environment such as carbon emissions, natural resources, energy efficiency, waste management, and raw material sourcing.

Factors that can negatively affect the Environmental score are irresponsible management of materials and waste, toxic emissions, and a lack of sustainable sourcing.

Social score

The Social score of an ESG rating is determined by customer satisfaction, human rights, labor standards, diversity and inclusion, data security, and privacy.

Opposition from stakeholders can arise from controversial sourcing and poor working conditions within the supply chain.

Governance score

The Governance score in an ESG rating examines the operating practices and standards of a company. To receive a high Governance score, a company must be:

  • Self-auditing
  • Consistently measuring and evaluating performance
  • Maintaining regulatory relationships
  • Practicing risk management
  • Compensating for achieving ESG goals

Investors want to see companies that practice strong business ethics, as well as provide transparency for stakeholders, customers, and employees.

How does the ESG score works?

The ESG score works by compiling data about the subject and weighing the issues against a standard scale.

The EcoVadis ESG score examines the performance of a company across several themes, taking into account emissions, human rights, procurement sustainability, and more.

How to improve ESG score?

If an ESG score is too low, improving the score begins with an audit of the company’s practices, and identifying the areas which need improvement, such as:

  • Unsustainable procurement practices
  • Human rights and labor infractions
  • Data and security breaches
  • Pollution and waste

Improving the ESG score can be handled in a number of ways, depending on where the score is lacking.

EcoVadis Ratings are evidence-based and adapted to more than 200 industry categories, 160 countries, and companies of all sizes. They cover four sustainability themes: Environment, Labor and Human Rights, Ethics, and Sustainable Procurement.

Improving your ESG score can consist of:

  • Fully understanding your ESG rating
  • Aligning to global and regulatory frameworks
  • Evaluating labor management and practices
  • Reducing waste and eliminating emissions
  • Implementing diversity and inclusion initiatives
  • Improving occupational health and safety

Why is ESG investing important?

Investors are placing more importance on non-financial factors when it comes to the analytic process in order to identify risk and potential room for growth.

An ESG score helps to identify where a company stands in regards to its environmental, social, and governance practices, which can be indicative of operations that bring risks to investors, customers, and the global community.

Key takeaways

  • ESG ratings help investors to evaluate risks within a supply chain, as well as help identify areas of improvement.
  • A good ESG rating is a quick and standardized way for investors, customers, and employees to gauge where a company stands in terms of environmental, social, and governance practices.

CLICK HERE to learn more about ESG and the EcoVadis rating methodology

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