Environmental, Social, and Corporate Governance (ESG) is an evaluation of a firm’s focus on social and environmental factors. It is typically a score that is compiled from various data sources and can be considered a form of corporate social credit score.
How are ESG scores calculated?
ESG factors are a subset of non-financial performance indicators which include ethical, sustainable and corporate government issues such as making sure there are systems in place to ensure accountability and managing the corporation’s carbon footprint.
Environmental criteria: waste, pollution, climate change, deforestation etc.
Social criteria: employee relations, diversity, working conditions, community impact, health and safety
Governance criteria: board diversity and structure, lobbying, executive remuneration, tax strategy etc.
The specific factors assessed vary by company, ESG rating firms commonly review things like annual reports, corporate sustainability measures, climate disclosures, board structure and compensation and even controversial weapons screenings. Scores generally follow a 100-point scale: The higher the score, the better a company performs in fulfilling different ESG criteria. Scores may vary among firms, which may employ different metrics and weighting schemes. Bloomberg, S&P Dow Jones Indices, JUST Capital, MSCI and Refinitiv are a few of the most well-regarded ESG research companies. Investors use these ESG scores to invest in companies that align with their and their clients priorities.
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