Environmental, social, and governance (ESG) refers to three categories of issues in business operations. Organizations need to analyze and report on their procedures and risks in these areas in order to be transparent with potential investors and other stakeholders, as well as regulators. Maintaining a high ESG score shows that your organization cares about operating ethically and responsibly.

ESG issues can obviously mean bad news for the environment or your employees, but also have broader consequences. If your organization is known for ignoring best practices in these areas, you could lose customers, investors, business partners, and your good public reputation. These lost relationships could lead to a lower bottom line.

In addition, ESG regulations are under increasing scrutiny worldwide and on the horizon in the US. Failure to get your program in place now might mean non-compliance fines and other penalties in the future.

Making misleading claims about your ESG score and procedures could also put you in legal hot water. In October 2022, a suit was filed claiming that the labels on Evian water products are an example of “greenwashing.” The suit says that the products’ claims of being “carbon-neutral” are misleading, as consumers might think this means they are made with zero carbon emissions, when, in reality, the manufacturers offset the emissions by purchasing carbon credits.

The first step in a robust ESG program is knowing your ESG score. In this guide, you’ll learn what an ESG score is, how it’s calculated, how to improve it, and why you should care.

What is an ESG Score?

An ESG score, sometimes called an ESG rating, is a number that indicates your organization’s performance in environmental, social, and governance operations.

To put it simply, an agency analyzes not just the number of ESG risks your company faces, but also how you are addressing them.

Widely used agencies include:

• MSCI ESG Rating
• Carbon Disclosure Project
• Bloomberg ESG Data
• Sustainalytics ESG Risk Ratings

ESG reporting is mandatory for companies with 500+ employees or over 500 million pounds or Euros in annual turnover in the UK and EU. There is no requirement for ESG disclosure in the US yet. However, the SEC has proposed standardized climate-related disclosures (including greenhouse gas emissions) for organizations to better inform investors of their risks.

RELATED: Environmental Compliance: Risks and Rewards for Companies

How Your ESG Score is Calculated

Each agency that determines ESG scores uses a unique evaluation system. For instance, some rate your organization against others in your industry, while other agencies assess all companies using the same criteria.

“Industry-specific scoring systems assess issues that have been deemed material to the industry at large,” explains Noah Miller, Instructor at CFI, Founder, Chief Strategy Officer & Head of ESG Advisory Services, Rho Impact. “Industry-agnostic ESG scores tend to incorporate widely accepted factors that are meaningful across industries—issues like climate change, diversity, equity and inclusion (DEI), and human rights.”

ESG scores are also more nuanced than “Is a risk present, yes or no?” Each criterion is usually weighted based on how negatively it could impact stakeholders, employees, and/or the public.

For example, an organization with large greenhouse gas emissions but no other ESG issues might still have a lower ESG score than an organization with both nepotism and harassment problems.

Unlike other compliance measurements, there are not yet any set requirements for your ESG assessment or program if you’re a US-based organization. You can choose which of these risks, if any, you want to disclose to stakeholders. Because agencies evaluate risk differently, your ESG score may not be consistent, making it an imperfect system until legislation is passed.

Why Do ESG Scores Matter?

So, why should your organization care about your ESG score?

First, even though the US doesn’t have reporting requirements right now, “more requirements for disclosure of climate change risks and related ESG issues are coming,” emphasizes Matt Kelly, Editor and CEO of Radicalcompliance.com. “Pay attention to how this chess game unfolds, and start thinking now about new policies, procedures, and controls you’ll need to have in place to extract ESG data from your operations and then put that information into a report,” he says.

Having a low ESG score can also affect your bottom line. If you’re not operating responsibly, investors won’t want to add you to their portfolio and customers won’t want to buy your products or services. Similarly, ESG issues put your organization’s brand and reputation at risk, as more and more companies are taking measures to be more eco-friendly, inclusive, and ethical.

Finally, your ESG score will become increasingly important for attracting and maintaining talent. According to one survey by Deloitte, millennials and Generation Z are, on average, nearly 30 per cent more likely to leave their jobswithin two years if they are dissatisfied with their employer’s societal impact, DEI (diversity, equity, and inclusion) efforts, and commitment to sustainability.

When it comes down to it, “employees want to know that they won’t be spending their time dealing with the drama of ethical dilemmas,” says HR expert Sharlyn Lauby. “People already have enough going on without adding the stress of deciding whether to report someone to HR.”

How to Improve Your ESG Score

For starters, what is a good ESG score anyway? Many agencies rate on a scale from zero to 100, where higher numbers are better. Think about it like grades in school: ESG scores above 70 are regarded as good, but 50 or below means you have a lot of work to do. Some agencies use letters instead, where CCC or C is the worst rating and AAA is the best.

If your ESG score isn’t where you’d like it to be, you need to start creating an ESG strategy. “Everybody saysESG is important, and wants better information about ESG issues within your enterprise; but most companies are still struggling to figure out the right technology or processes to extract that data from operations,” says Kelly. To build your plan, consider:

• What laws and regulations do you currently need to follow? What, if any, could you be subject to in the near future (e.g. future US environmental reporting laws)
• Who will analyze, monitor, correct, and prevent ESG risks within your organization?
• What ESG issues are important to your industry, investors, clients, and customers specifically?
• What are your weak points/areas of risk for ESG concerns and what do you already handle well?

After you’ve written and implemented your strategy, build it into your culture, policies, and procedures. ESG isn’t a temporary project; it’s a set of long-term concerns that will only grow in importance. By making diversity, eco-consciousness, ethics, and other considerations part of your daily operations, it won’t seem like a chore, but, rather, business as usual.

If this feels like too much change too fast, start with a volunteer committee, then move on to recruiting “at least 50% of your organization’s staff” to voluntary initiatives, says Robert Eigenheer, Head of Capital Markets and Head of Treasury & Asset Management at EUROFIMA European Company for the Financing of Railroad Rolling Stock. “If you remain a small group of sustainability aficionados,” he continues, “you won’t change your ESG performance and public perception about your organization.”

Managing ESG Incidents

Finally, you need to have systems in place to manage your risks and any ESG-related incidents that arise. Case management software like Case IQ gives you insight into your risks by compiling historic incident data into easy-to-interpret charts and graphs. Use these reports to determine problem areas that need corrective and preventive measures the most.

If you choose an all-in-one platform like Case IQ, you’ll also be able to track and manage your cases from start to finish in one centralized system. When all case information is in one place, complete with a timeline of actions from the entire team, you’ll improve efficiency and resolve issues faster. Your team will spend less time spent on busy work and more on meaningful steps toward improving your ESG score.