In recent years, large corporations have shifted their focus toward environmental sustainability and equality of outcome, rather than opportunity. Whether that means having a diverse board of executives, or measuring a company’s carbon footprint, both CEOs and investors have made this a priority.
But how is this measured?
An ESG score—also known as Environmental, Social, and Governance—considers a company’s long-term effect on social and environmental issues. While corporations are focusing on these issues internally, investors are also considering a company’s ESG score when supporting businesses.
ESG scores are calculated by examining shareholder proposals, investor agreements, and company policies as they concern ESG-related matters.
Environmental scores are evaluated by looking at a company’s energy use, waste production, and pollution.
Social scores examine the company’s business relationships and other companies they may have engaged with in the past. This also includes company wages and ethics.
Governance scores look at the company’s accounting methods and potential conflicts of interest.
While this may seem positive, a company’s ESG score can actually have a large impact on their ability to conduct business.
For example, the Securities and Exchange Commision (SEC) recently considered a rule in which public companies would be required to disclose their companies ESG scores to financial companies, credit rating agencies, and asset managers. If the company’s ESG scores did not fall within the desired range, their credit rating would be docked, and they could in-turn be denied business loans or investments.
While it’s important to consider the environmental, social, and governmental effects of your business, it begs the question of whether businesses should be punished for not meeting the desired threshold of investors.