What should ESG scores measure?
TELL US WHAT YOU THINKThe global economic transition to an equitable, net zero and sustainable future is both one of the most pressing challenges and greatest responsibilities we have in front of us as a society today. More than ever, investors and companies seek evidence-based insights, high quality data and advanced analytics to support their investment strategies when linking sustainability and business performance. One of the most important tools that companies and investors utilize to assess sustainability performance is an ESG score. An ESG score is typically a headline number that presents the provider’s opinion of a company or entity’s performance against pre-defined ESG criteria.
Company engagement, consistent, comparable, and assured disclosures, and rigorous analysis are the vital building blocks for robust ESG scores. At present ESG disclosures by companies can be inconsistent, leading to data gaps that need to be interpreted or modeled in order to present the most comprehensive view available at that point in time. Fortunately, we are seeing an evolution here, as an increasing number of jurisdictions are mandating disclosure of ESG factors, in particular climate, which will hopefully make disclosure more consistent and widespread. S&P Global welcomes the work of the International Sustainability Standards Board (ISSB) and other bodies in support of the advancement towards standardized ESG disclosures from companies.
As we see the ESG market grow and continue to evolve, I would argue two specific elements of an ESG score will be essential to unlocking further growth, progress on sustainable goals, and market confidence: transparency and impact.
1. Transparency is key to ensuring that insights and analytics are able to be interpreted appropriately. A range of approaches has evolved around how to measure the ESG performance of a company, which has led to some confusion in the market. How can ESG scores be so different from one another? The answer is that they are trying to measure different things.
There are a number of different approaches or methodologies for assessing the performance of a company against ESG criteria. For example, it could be argued that climate is the single greatest issue for our society, and this should receive the greatest consideration when assessing a company. Others may take a different view, considering diversity and inclusion or a living wage policy to be of equal importance to a net zero strategy. Perhaps these differences are to be welcomed – market participants often value a diversity of opinions to support their decision making. But there must be transparency to mitigate market confusion and enhance understanding. Transparency ensures there is clarity on where and why there are differences of opinion.
2. I also believe it is critically important to measure a company’s impact on society and the environment when assessing its ESG performance. I recently had the honor of chairing a workstream of the G7 Impact Task Force, established under the UK’s 2021 presidency of the G7 to support progress in mobilizing private capital for public good at scale and with integrity. But what is meant by impact? In the case of ESG, it refers to the impact of a company on society, for example, a food retailer may create positive impact through a commitment to sustainable agriculture practices or a construction company may have a policy in place to support a living wage for its people.
I believe strongly that financial markets can be a powerful force for good and that transparent and rigorous ESG scoring is an essential tool for market participants to evaluate and optimize their societal impact. It will be impossible for ESG scores to support progress on sustainability goals if measuring impact is not an integral part of an ESG assessment. Alongside impact, it is prudent to consider risk, e.g., future carbon pricing or physical risks, as part of this assessment. However, I would argue that an ESG score does not support the basic principles of ESG investing if it considers risk alone.
Having set out the vital elements of an ESG score, how then does S&P Global approach transparency and impact in the context of the S&P Global ESG Score?
We are transparent. We publish our S&P Global ESG Score methodology on our website, including the rationale for our questions, the format, background information and the weights. Through the S&P Global Corporate Sustainability Assessment (CSA), over 2,200 companies engage directly with us to provide in depth information on ESG, and we cross-check, validate, and standardize our ESG and climate intelligence with the 11,000+ companies that we assess. And, in doing so, we assess impact alongside risk and sentiment. We consider and measure performance against risk and impact metrics.
And why does this focus on impact and transparency for ESG scores matter to the wider world?
To focus on climate, two-thirds of the largest companies around the world have at least one asset at high risk because of the physical hazards created by a warming climate and yet we are not on track to meet the goals of the Paris Agreement. To change this, there must be global acceleration and scaling of action. The investment community is responding to this need, with over half the world’s assets under management committed to net zero by 2050. But these commitments need to be realized. It is essential that investors have access to the most rigorous and credible tools to support their decision making as they seek to make progress towards meeting these commitments.
