In competitive sports, any losing team that dares dish out trash-talk toward its opponent is likely to be met with a simple one-word response: “scoreboard.” That’s because, at the end of the day, the score is the only thing that matters.
Modern businesses are often inclined to take a similar approach when it comes to ESG (environmental, social, and governance) performance: They tailor their strategies around that seemingly all-important ESG score, hoping that its authority will quell any related concerns from investors, customers, employees, and the like.
This is a mistake. Although they have their usefulness, ESG scores are not as meaningful nor consequential as many hold them to be.
Here, the score is hardly all that matters.
What Are ESG Scores and Who Provides Them?
If you’re not familiar yet with this fast-rising priority, we invite you to brush up on what ESG is and why modern businesses are getting serious about investing in it.
ESG scores take into account a variety of factors to measure a company's long-term exposure to environment, social, and governance risks. These scores are calculated by third-party agencies that specialize in ESG scoring.
What is ESG Scoring and What Does it Mean?
As they say, what doesn’t get measured doesn’t get managed (or improved). ESG scores, or ESG ratings, have emerged as a way for organizations to gauge their ESG performance. These evaluation systems take into account factors such as resource use, greenhouse gas emissions, waste management, employee engagement, community involvement, and more.
You’ll notice we said rating systems, not rating system. Here is where the issues with ESG scores begin to arise. There is no universally accepted standard or source for these scores. Scores of ranking and rating platforms have emerged, offering their own frameworks, formulas, and algorithms to arrive at any given ESG rating.
That’s problematic.
ESG Score Ratings Are Plagued By Inconsistency
In 2019, State Street Global Advisors published results of an 18-month due diligence assessment, looking cross-sectionally at ESG scores from four leading data providers (Sustainalytics, MSCI, RobecoSAM, Bloomberg ESG).
“Our research determined a correlation of only 0.53 among their scores, meaning that their ratings of companies are only consistent for about half of the coverage universe,” SSGA reported.
In a sports contest, everybody knows the score. The scoreboard is an irrefutable source of truth. This is lacking in the world of ESG ratings, which Antea Group’s Owen McKenna refers to as “the wild west.”
“The lack of consistency and lack of alignment within ESG scores is a growing problem,” he observes.
A recent article in Vogue Business examined the state of ESG scoring in the fashion industry, where sustainability has become a key focus.
“Investors conducting due diligence frequently use more than one rating and regularly evaluate which ones they use,” writes Jasmin Malik Chua. “Questions continue to mount, however, over the credibility and accuracy of such ratings, especially when so many are jostling for primacy using disparate methodologies and a reliance on voluntary disclosure, which allows brands to more or less dictate the outlines of the narrative they wish to tell.”
That last part really explains why stakeholders and investors are dubious of ESG scores. It’s not that they’re inaccurate or worthless — they often transparently evaluate a lot of really important things — but there is a great deal of subjectivity and selectiveness in play.
As one example, the Vogue article points to British fast-fashion e-tailer Boohoo, which received a prized Double-A score from MSCI last summer shortly before high-profile allegations of poor working conditions within its UK supply chain made headlines.
“Some critics wonder if a company’s social and environmental performance, with its myriad nuances, can be boiled down into something as reductive as a score, let alone employ it as a point of comparison,” the article notes.
What To Do Instead?
ESG scores are not without their merits and benefits. Even critics would acknowledge that it’s good to see companies scrutinizing their ESG performance and providing transparency around their practices.
So how should today’s businesses approach ESG ratings instead? The answer is simple: look beyond the scores to see if, and how, your primary stakeholders use the ratings and the data that goes into them and focus on the factors that matter most to them. Evaluate your current and potential ESG risks and use this as a guide for your ESG strategy.
In many cases, identifying these factors is merely a matter of asking. A questionnaire or even a candid conversation can bring priorities to light. Consider conducting a materiality assessment to gain a more in-depth understanding of your organization's ESG risks and opprtunities.
“Reach out to your primary stakeholders and see how they evaluate you in terms of ratings and rankings,” Owen advises. “you may find there is a disconnect between what you think is important and what they actually use to evaluate your ESG performance. Once you’re able to identify the information that matters most to the people who matter most, you can prioritize responses to ESG raters based on level of impact.”
