Do ESG Scores Really Matter? The Answer May Surprise You
In competitive sports, any losing team that dares dish out trash-talk toward its opponent is likely to be met with a simple one-word response: “scoreboard.” That’s because, at the end of the day, the score is the only thing that matters.
Modern businesses are often inclined to take a similar approach when it comes to ESG (environmental, social, and governance) performance: They tailor their strategies around that seemingly all-important ESG score, hoping that its authority will quell any related concerns from investors, customers, employees, and the like.
Here, the score is hardly all that matters.
What Are ESG Scores and Who Provides Them?
If you’re not familiar yet with this fast-rising priority, we invite you to brush up on what ESG is and why modern businesses are getting serious about investing in it.
As they say, what doesn’t get measured doesn’t get managed (or improved). ESG scores, or ESG ratings, have emerged as a way for organizations to gauge their ESG performance. These evaluation systems take into account factors such as resource use, greenhouse gas emissions, waste management, employee engagement, community involvement and more.
You’ll notice we said rating systems, not rating system. Here is where the issues with ESG scores begin to arise. There is no universally accepted standard or source for these scores. Scores of ranking and rating platforms have emerged, offering their own frameworks, formulas and algorithms to arrive at any given ESG rating.
ESG Ratings Are Plagued By Inconsistency
In 2019, State Street Global Advisors published results of an 18-month due diligence assessment, looking cross-sectionally at ESG scores from four leading data providers (Sustainalytics, MSCI, RobecoSAM, Bloomberg ESG).
“Our research determined a correlation of only 0.53 among their scores, meaning that their ratings of companies are only consistent for about half of the coverage universe,” SSGA reported.
In a sports contest, everybody knows the score. The scoreboard is an irrefutable source of truth. This is lacking in the world of ESG ratings, which Antea Group’s Owen McKenna refers to as “the wild west.”
“The lack of consistency and lack of alignment within ESG scores is a growing problem,” he observes.
A recent article in Vogue Business examined the state of ESG scoring in the fashion industry, where sustainability has become a key focus.
“Investors conducting due diligence frequently use more than one rating and regularly evaluate which ones they use,” writes Jasmin Malik Chua. “Questions continue to mount, however, over the credibility and accuracy of such ratings, especially when so many are jostling for primacy using disparate methodologies and a reliance on voluntary disclosure, which allows brands to more or less dictate the outlines of the narrative they wish to tell.”
That last part really explains why stakeholders and investors are dubious of ESG scores. It’s not that they’re inaccurate or worthless — they often transparently evaluate a lot of really important things — but there is a great deal of subjectivity and selectiveness in play.
As one example, the Vogue article points to British fast-fashion e-tailer Boohoo, which received a prized Double-A score from MSCI last summer shortly before high-profile allegations of poor working conditions within its UK supply chain made headlines.
“Some critics wonder if a company’s social and environmental performance, with its myriad nuances, can be boiled down into something as reductive as a score, let alone employ it as a point of comparison,” the article notes.
What To Do Instead?
ESG scores are not without their merits and benefits. Even critics would acknowledge that it’s good to see companies scrutinizing their ESG performance and providing transparency around their practices.
So how should today’s businesses approach ESG ratings instead? The answer is simple: look beyond the scores to see if, and how, your primary stakeholders use the ratings and the data that goes into them and focus on the factors that matter most to them.
In many cases, identifying these factors is merely a matter of asking. A questionnaire or even a candid conversation can bring priorities to light.
“Reach out to your primary stakeholders and see how they evaluate you in terms of ratings and rankings,” Owen advises. “you may find there is a disconnect between what you think is important and what they actually use to evaluate your ESG performance. Once you’re able identify the information that matters most to the people who matter most, you can prioritize responses to ESG raters based on level of impact.”
While a customized ESG reporting framework informed by stakeholder materiality offers a better way to meaningfully measure, benchmark, and improve, that doesn’t mean you need to go it alone. Bringing in an experienced and knowledgeable third-party consultant like Antea Group can provide clarity and confidence in your decision-making.
Learn more about our sustainability consulting services.
About Antea Group: Antea Group is an international engineering and environmental consulting firm specializing in full-service solutions in the fields of environment, infrastructure, urban planning, and water. By combining strategic thinking and multidisciplinary perspectives with technical expertise and pragmatic action, we do more than effectively solve client challenges; we deliver sustainable results for a better future. We serve clients ranging from global energy companies and manufacturers to national governments and local municipalities. Learn more at https://us.anteagroup.com.