In modern business, it’s not enough to simply post a sustainability statement to show your commitment to the environment. You need third-party verification to prove your dedication.

An ESG credit score is one way to gain such verification. But, what is an ESG score, and how can it work for your business? Let’s take a look.

What Is An ESG Score?

ESG scores are objective analyses of an organization’s Environmental, Social, and Governance (ESG)—essentially a sustainability scorecard. An ESG report filed by a reputable body will evaluate all factors of an organization’s ESG using an established framework—like the Global Reporting Initiative (GRI), the Principles for Responsible Investment (PRI), or the Sustainability Accounting Standards Board (SASB)—and then provide an overall score. High ESG scores from a trusted third party shows investors, stakeholders, and customers that the organization’s operations carry low negative environmental and social impact.

Although ESG scores are an important part of modern business, the lack of regulation is cause for consideration. Because ESG investing is a fast-growing market, there is a vast array of various ESG scoring systems and evaluators available, but not all of them are reputable. There are calls for the Securities and Exchange Commission (SEC) to regulate such entities, but at the moment, no formal regulations exist. 

Companies that seek ESG ratings must thoroughly research their evaluators and ensure that their ranking systems are thorough and follow established frameworks. Ideally, they can stick to well-established rating platforms like Institutional Shareholder Services (ISS) or the Carbon Disclosure Project (CDP).

Why Your Business Needs An ESG Credit Score

ESG ratings are quickly becoming a must-have in modern business. ESG scores from reputable entities show stakeholders, customers, and internal decision-makers exactly where your organization stands in terms of its sustainability initiatives. This is especially important for organizations seeking investors, looking to gain green financing, or pursuing ESG certification. To procure any of the above, you will need to provide an analysis of your impact, and ESG scores deliver just that.

Here are the primary ways that ESG scores might be used.

• Gain new investors: ESG investing is a fast-growing market in which investors make decisions based on a company’s social and environmental impact as well as its potential ROI. If your company wants to remain competitive in this new market, an ESG rating is needed.
• Risk management: ESG goes beyond environmental impact. Poor ESG scores can lead to fines, taxes, and fees imposed by current and future ESG regulations. Furthermore, a low ESG ranking may highlight issues in logistics and other costly operational matters. By receiving an ESG score, you can see where your company stands and what changes need to be made.
• Supply chain management: A comprehensive ESG rating will analyze your suppliers alongside internal operations. Receiving ESG scores will provide important data surrounding your suppliers, allowing you to address any issues.
• Gain ESG certification: To gain high-level green business certification, your organization must undergo an in-depth analysis. Getting an ESG score beforehand will help your organization see if it has the credentials to apply for green certification, and if not, areas where it must improve before gaining certification.
• Stakeholder expectations: Today’s consumers, investors, and employees expect the companies that they support to be sustainable. A good ESG rating will ensure that you remain competitive and build trust with relevant stakeholders.
• Obtain green financing: If you’re in pursuit of financing for your sustainability initiatives, such as through a green loan or green bond, then you may need ESG scores to obtain such funding. 
• Achieve sustainability KPIs: If you’ve been working towards bigger goals as part of your sustainability strategy, then the third-party sustainability audit required to receive the ESG rating will be highly beneficial. It will give you an objective analysis to determine whether you’re on the right track or if you need to make adjustments.

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Read more: Benefits of Corporate Social Responsibility

Who Calculates An ESG Score?

ESG scores are calculated by whichever rating agency you choose. Currently, around 140 agencies are available; however, they are not equal. It’s important that your company chooses reputable ESG agencies that use thorough methodology and established frameworks so that you and your stakeholders can trust their accuracy.

There are a handful of top-tier ranking agencies whose methodology is trusted. Here are the well-established rating agencies and how their scores are calculated.

Sustainalytics & Morningstar

The Sustainalytics ESG Risk Ratings scale places your company from 0 to 100, with zero noting low ESG risk and 100 noting considerable risk. Scores over 40 indicate significant ESG risks or severe risk. This scale is designed to be compared against organizations’ peers to improve risk management. To calculate the rating, Sustainalytics will measure the full exposure to ESG risks and how well it manages that risk. The final score shows the amount of unmanaged ESG risk.

ISS

ISS provides ESG scores based on online reporting, corporate findings, disclosures from regulatory agencies, and media (including social media). The subsequent score is provided in letter form, from A+ to D-. They also provide a Governance Quality Score, an SDG Impact Rating, and a Cyber Risk Score. Their scores are considered within the organization’s industry, and they will provide an additional rating of “Prime” or “Not Prime” based on the industry’s performance. Because the ISS is one of the top firms, good scores carry weight when it comes to green investors.

MSCI

MSCI ESG ratings measure long-term ESG risks and are used by a large number of investors. It analyzes 33 points within a company’s Environmental, Social, and Governance pillars, which are then adjusted based on the industry. The final score provided goes from AAA (noting low ESG risk) to CCC (noting high ESG risk). Once the score is provided, MSCI will continue to monitor your company’s performance using publicly available data, so it’s important that companies that receive an MSCI score keep up with their sustainability initiatives to maintain good standing.

S&P Global

The ESG rating by S&P Global analyzes up to 1,000 data points that they gather on their own. Additionally, they’ll garner information from the S&P Global Corporate Sustainability Assessment (CSA), which is a 130-question survey that the company must provide itself with evidence for all of its claims. From there, S&P Global assigns a score from 0 – 100, with 100 noting excellent ESG performance. These scores are available online with high-level analysis backing up the score.

Want to know where your business stands? Get your sustainability scorecard with our quiz:

ESG Scoring Criteria

The scoring criteria for ESG ranking depend on the rating agency you use. As you can see above, each agency has its own scores and data collection methodologies. Remember that ESG scores are designed to accurately represent your company’s impact. Regardless of which ESG rating agency you choose, your best bet for achieving a high score is to achieve high-level targets in all three ESG pillars.

Here are the things that you should focus on to gain good ESG scores, regardless of which agency you use:

• Environmental: This covers your company’s environmental impact. Make sure that you know your carbon footprint, energy and water usage, recycling rates, waste management, and more. If your company has strict processes surrounding its environmental footprint, then your ESG scores will reflect that.
• Social: This takes into account the social impact of your company’s presence. Are you active in the local community? Are your products ethically sourced? Do your warehouses or manufacturing centers provide employment to the local population? If your company has a positive impact on the communities in which it works, then this part of your ESG score should be high.
• Governance: This final pillar covers internal administration and how the company is run. Is there corruption? Are employees fairly compensated? Can you showcase diversity? Consumers often ignore this pillar, but it’s still an important consideration when it comes to your ESG score.
• Supply chain: When you seek your ESG rating, remember that they’ll analyze your suppliers, too. Before you get rated, conduct your own sustainability reporting and supply chain audit to determine if you need to work with your suppliers to prevent them from negatively affecting your ESG rating.
• ESG risk factors: Many ESG rating agencies also analyze ESG risk. This piece covers compliance, long-term sustainability, and reputational risks, so it’s very important to remember. To minimize your ESG risk, make sure that you have long-term plans for sustainable development and that you’re proactively managing ESG risk.

What Is A Good ESG Score?

What constitutes a good ESG score will depend on the agency that you choose. They all have different rating systems and methodologies, and they can’t really be compared against each other. Similarly, companies in two different industries can’t compare their ESG scores, even if they use the same agency. A low-risk score for a company in fossil fuels will be much higher than a low-risk score given to a communication company, as fossil fuels inherently carry a high ESG risk. 

Although there is no direct answer to this question, we can discuss what a good ESG score means. Here’s what good ESG scores can say about your business:

• Above average within your industry: A good ESG score shows that you are above average within your industry when it comes to managing your impact. 
• Transparency: To gain an ESG rating, you expose your business to outside analysis, which displays high levels of transparency and disclosure.
• Commitment to improvement: Because many ESG agencies analyze ESG risk, a high score can denote a commitment to improvement and long-lasting sustainability initiatives.
• Risk management: Because risk is a factor of many ESG scores, a high rating shows high levels of risk management to your stakeholders and possible investors.
• Positive impact: Perhaps most obviously, a good ESG score showcases a positive impact on the environment, the communities in which you work, and your employees.

How To Obtain Your ESG Credit Score

Obtaining an ESG score will largely depend on the agency you choose. While some agencies, like S&P Global, use data provided by the company, others rely on data they secure elsewhere. When you choose your ESG rating agency, they will inform you of the process and what you need to do in order to gain your score.

That being said, there are a few steps that you can take before and after receiving your score.

Here are the steps that you need to take prior to obtaining an ESG score.

1. Conduct an internal audit using sustainability management software to ascertain your current ESG stance. Although this is not a requirement for receiving an ESG score, it will highlight exactly which areas of your supply chain could be improved. This allows you the opportunity to fix any issues that might earn you a low initial score. Once you obtain an ESG rating, it will be publicly available, and you don’t want to have a low ESG score out there.
2. Research and choose an appropriate agency. The agency that you choose should use established frameworks and trusted methodology and display a proven track record. Their scoring system should also reflect your overall goals. For example, if you want to show to potential investors that you’re a low Environmental, Social, and Governance risk, you should consider an agency like Sustainalytics whose reporting system is specifically designed to analyze risk.
3. Complete the audit as directed by the ESG reporting agency.
4. Use your ESG score to gain investors, earn ESG certification, build trust with your customers, procure green financing, and more.
5. Once you’ve received your score, strategize ways to improve or maintain it. Sustainability is a never ending road, and even if your company receives top ESG scores, it needs maintenance. Reputable ESG rating agencies will continuously monitor your company and update your score as needed, so it’s up to you to ensure that your operations continue to earn a top ESG score.

Conclusion

Obtaining a high ESG score is a challenge, but EcoCart’s tools make it easier. Our sustainability dashboard, checkout widget, and LCA will all support ecommerce businesses in improving their Environmental, Social, and Governance and earning top ESG scores. Ecommerce companies with high scores enjoy a wide range of benefits, from improved customer loyalty to quality investors, and more. Reach out to our team for a demo today.