What is ESG Score?

Some business that sells goods or services to consumers aims for profit. In order to run its business well, there are many different aspects that an organization has to cover.

In recent years, a new trend has emerged, where investors consider environmental, social and corporate governance aspects to measure the condition and performance of a company, also known as the Environmental, Social, and Governance (ESG) score. Thus, the ESG score measures a company’s performance on ESG issues and the level of risk associated with ESG.

The ESG score is an important comparison tool for value-minded investors, asset managers, financial managers, and other stakeholders who measure a company’s ESG performance over time and compare it to the market and its peers in the same industry.

As ESG standard benchmarks are constantly evolving, ESG scores issued by independent third parties serve as an important reference for comparison. This score can be an important factor in attracting capital and maintaining the transparency of stakeholder communications about ESG.

How is the ESG Score created?

In this ESG method, there are 3 main indicators that are evaluated:

  1. Environmental performance indicators are measured using an environmental disclosure score that is seen from the company’s operational activities and their impact on the environment, such as carbon emissions, greenhouse gas emissions, climate change (risks caused by company operations), changes in ecosystems, facilities that can cause environmental damage, business licenses, pollution, renewable energy, depletion of natural resources, waste disposal, use of toxic chemicals, and others.
  2. Corporate social performance indicators are measured using a social disclosure score seen from several indicators, such as environmental welfare (in this case animals), child labour, employee diversity, facilities that can cause social risks, employee wage problems, contributions and political risks, sexual harassment, slavery, election of an advisory board on executive compensation, and others.
  3. Corporate governance indicators are measured using a governance disclosure score seen from several indicators, such as executive compensation, the relationship between company stakeholders, stakeholder rights, division of positions, director authority arrangements, managers, shareholders, and other parties.

Currently, there are many third-party institutions that discuss and evaluate this ESG Score, including research and analysis organizations or companies. The methodology, scope, and formula used vary widely between organizations.

Why is ESG Score important?

Company performance in terms of ESG – including the three key indicators mentioned above – is increasingly becoming an important factor for stakeholders and in investment decision-making. Therefore, the consequences of substandard values can be very important. As a result, forward-thinking parties want an understanding of their company’s ESG issues and activities, ESG scores, and the various third-party organizations that evaluate ESG scores.