Sustainability Ratings: More to a Score
ESG Scores and Sustainability Investing
ESG Scores are a useful tool in getting a sense of how sustainable a company is and making a quick comparison. In fact, a majority of responsible investors use ESG scores when making decisions about the type of company they wish to invest in, especially since it’s an easy and quantifiable way to ensure that a company is sustainable by industry standards.
Despite its uses, however, there are a few issues with using ESG scores alone when trying to invest responsibly. One pretty well-known issue is that there’s no standardization when it comes to calculating ESG scores, meaning one company can calculate an ESG score entirely different from the way another company calculates an ESG score based on their own personal values. This connects to another issue with ESG scoring, which is that ESG scores are generally pretty static and don’t really represent the full picture behind a company’s sustainability. Even if the calculations behind ESG scores were standardized, a sustainable investor still wouldn’t know the specifics of how well that company actually aligns with their values or not. For example, if a sustainable investor is more concerned with environmental impact than they were with social impact, they might not know if the company they’re investing in is considered sustainable mostly for their social impact or environmental.
The Story Behind the Score
In order to make ESG scores less static, investors need to understand how the scores are calculated and the raw data behind the score. Responsible investors have different needs and wants from each other when it comes to investing in a company, and the best way to determine whether a company aligns with one’s personal values is to provide scores and data for the various aspects of sustainability investing. An ESG score cannot provide the level of details required by investors, who may want information regarding a specific aspect of sustainability- like emissions or gender equality.
Investors should also know which companies in their portfolio are contributing the most in terms of sustainability for whatever issue they choose to focus on. While an ESG score gives an idea about which companies are more sustainable than others, it doesn’t allow for a comparison of real sustainable data such as emission produced, or waste recycled.
Benefits to Getting the Full Story
Responsible investors aim to invest in companies that align with their values and that are going to remain sustainable in the long term. While ESG scores provide a good starting point for investors just starting out, over time it becomes imperative to gain further insight into what exactly makes a company sustainable or not. Getting the full story through a combination of different scores and raw data for more specific issues is one way to better understand your investors.
Physis is a fintech company that offers investors a variety of ESG offerings and data to manage, track, and understand the impacts of your investments. We make it easy for institutional investors to prove the sustainability of a company or fund beyond the ambiguous ESG score. Find out how we can help you today!