ESG-scores generally assess the impact of environmental, social and governance factors on a company and a company's impact on the outside world.
Credit ratings assess the creditworthiness of companies or financial instruments by providing an assessment of a company's risk of default. An ESG score is an objective measurement or evaluation of the performance of a particular company, fund and their impact with respect to Environmental, Social and Governance (ESG) issues. Specific evaluation criteria vary among the various rating platforms that issue ESG scores; however, they all fall within one (or more) of the E, S or G categories.
The score is determined by considering a company's social impact on environmental responsibility and governance practices. The result of this score is then used by investors when deciding whether or not to invest in a particular company's stock.
Additionally, as more companies begin by incorporating ESG ratings into their business plans under pressure from investors, some have seen improved performance and higher stock prices at the time of IPO (initial public offering).
This is attributed both to investor demand for sustainable investments and the fact that ESG ratings can lower the cost of doing business by reducing risk.
What are the benefits of a good ESG rating?
In addition to a higher stock price, good ESG can also lead to more benefits for employees and a healthier company. An increase in ESG score has been seen to correlate with increases in innovation, productivity and profitability.
This is because companies with a good ESG score, such as B-Corps, have more engaged employees who are willing to take more risks and innovate. There are also environmental benefits.
As companies improve their ESG score, they can reduce their resource consumption and waste levels, which will result in a healthier planet. If you are thinking about getting ahead, you may want to learn how to write a report before you are asked to create one.