ESG doublespeak: Knowing the score with ESG ratings

A notepad sketch of a lightbulb with a question mark inside of the bulb

In post “1. The uncomfortable truth”, we highlighted how ESG ratings don’t measure a company’s impact on the Earth and society. Let’s now look at how companies might assess CSR-bang for ESG-buck and how third-party ratings can play a role in the trouble with ESG.

It had all started so well. In 2004, the Secretary-General of the United Nations wrote to over 50 CEOs of major financial institutions. He invited them to participate in a joint initiative to find ways to integrate ESG into capital markets. Following the 2005 UN-sponsored report, ‘Who Cares Wins: Connecting Financial Markets to a Changing World’, the idea that embedding ESG considerations would lead to better societal outcomes reached the world’s attention.

In practice, ESG programs are structural to how the company operates; they are hard to implement and expensive. For some companies, the benefits outweighed the high cost, like gaining favour from sustainability-oriented investors and consumers. For others, they don’t. CSR activities are easier and cheaper to implement. These can improve external relationships without troubling what the company makes or how: the focus is on corporate philanthropy or partnerships with community groups. CSR is good for the brand but not foundational to running the company. It is nice but additive and occasional.

Independent ESG scores provided by third parties take some complexity out of evaluating a company’s behaviours. But the scoring business is unregulated, and each provider uses a different method. Rating agencies differ in almost every approach to ESG scoring, from the factors they weigh to the formulas they use.

What is considered a good score varies, and fossil fuel companies can have better ESG ratings than makers of electric vehicles.

In its 2021 Impact Report, Tesla said, “Current ESG evaluation methodologies are fundamentally flawed. To achieve acutely needed change, ESG needs to evolve to measure real-world Impact”. Suppose you’re looking to attract ESG money, scores matter. If you are looking to help the planet, they matter much less.

Join us on Wednesday 30th November to explore the role of communications in disentangling ESG at a time when sustainability has never been higher on the world’s agenda – Register.

Richard Costa, director and head of corporate reporting at Ensemble Studio.

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