What is an ESG Score and Why Should it be a Part of Your People Strategy?

According to the UN’s Intergovernmental Panel on Climate Change (IPCC), greenhouse gas emissions (GHGs) must be limited by 2025 to avoid the irreversible effects of climate change. Asia Pacific has a crucial part to play, as an increasing share of global emissions will come from the region; this has seen an increase from 35% in 2010 to 39% in 2019.

Net zero emissions ensures that business growth not only benefits the bottom line but also ensures a legacy for the people and the planet. To estimate your company’s impact on climate change and other no-less critical issues, you can refer to ESG HR specialists.

But what is an ESG score? In this article, we’ll delve into its definition, how it’s calculated, and why it’s crucial to incorporate it into your people strategy.

What is an Environmental, Social, and Governance (ESG) Score?

what is an ESG score

An ESG Score, or Environmental, Social, and Governance score, is an unbiased, quantitative measure of a company, fund, or security’s adherence to ESG criteria. This score reflects the level of consideration ESG HR leaders give to ESG risks.

However, the answer to “what is an ESG score?” is a challenging one because it lacks standardization. Various providers use different metrics and rating systems, each focusing on one or more ESG categories and then computing an overall ESG score.

Still, what exactly does ESG HR score assess in terms of risks or concerns?

Some rating systems focus on general factors that are relevant across different industries, such as climate change, inclusion, diversity, and human rights. Others are more industry-specific, focusing on issues that are prevalent within those sectors.

For example, the roofing industry faces the risk of slip accidents, which can lead to severe injuries. This necessitates the implementation of fall protection measures.

How are ESG Scores Calculated?

Explaining the calculation process for an ESG score, which addresses the question “what is an ESG score?”, typically involves three main steps, depending on the rating agency.

Firstly, the rating agency collects data to assess your company’s environmental, social (including ESG HR practices), and governance risks. Resources may include:

This data is compiled using reporting frameworks such as:

  • Global Reporting Initiative (GRI)
  • Principles for Responsible Investment (PRI)
  • Sustainability Accounting Standards Board (SASB)

Secondly, the reporting agency determines the weight or value to each data point based on its potential impact within a two-year timeframe. They then evaluate the company’s performance regarding these issues and assign a rating.

Finally, the agency calculates the overall ESG score by multiplying the ratings with their respective weights.

For instance, MSCI uses 37 key issues and assigns scores from zero to 10 based on their impact and timeliness. A higher score indicates better risk mitigation. Companies may receive a classification such as “leader” with a score range of  5.714 to 10.000, and a letter score of AA to AAA.

Omni Tip on ESG HR:
To get a well-rounded evaluation, you can compare your company’s ESG score across different agencies.

How Does ESG Score Impact Your Organization?

what is an ESG score

Now that you have a grasp on “what is an ESG score”, It’s important to understand its importance and give ESG HR the attention it deserves.

Ensure Compliance With Regulations

A strong ESG score can deter regulatory agencies scrutiny, minimizing the risk of investigations, fines, and legal issues. This translates to substantial cost savings and avoids reputational damages that often arise with legal troubles. A high ESG score signifies that your organization is committed to meeting environmental, social, and governance standards, which can help build trust with regulators and stakeholders alike.

Source of Competitive Advantage

A high ESG score can heavily impact your business by creating a competitive advantage. Here’s why:

Investors may incorporate an ESG review into their investment analysis to gauge a company’s long-term potential, risks, and strategic priorities.

For other investors who prioritize ethical and sustainable business models, they may use an ESG rating as a primary screening criterion. Companies with low ESG scores, typically below 50, may be eliminated from consideration by socially responsible investors.

These investors often compare a company’s ESG performance across various providers for a comprehensive assessment. Additionally, they assess a company’s ESG HR practices against that of other companies. This underscores the importance of understanding ‘what is an ESG score’ to gain a competitive advantage.

Attracting and Retaining Workforce

A higher ESG score corresponds to lower ESG risk rates and lower attrition rates. But what is an ESG score to top talent, and why do they care?

Millennials and Gen Z, who form the majority of the workforce, prioritize mitigating ESG risks due to their heightened awareness and access to resources.

According to the Asia Pacific Workforce Hopes and Fears Survey 2022, these generations value transparency regarding health and safety records, economic impact, environmental impact (such as climate change), and diversity and inclusion in the workplace. This demand on transparency indicates that millennials and Gen Z make employment decisions based on these factors, highlighting the importance of employee engagement and attraction.

Gen Z, often called the “change generation,” prioritizes purpose over salary and is highly conscious of its social impact. These generations seek proof of sustainability efforts, making an ESG score a key indicator of effective ESG HR risk management.

As organizations focus more on improving their ESG commitment and scores, HR departments can achieve greater success by retaining and attracting top talent, reducing the cost of recruitment, and enhancing employee performance.

Read next: Is Your Business Prepared to Work With Gen Z and Gen Alpha?

Risk Management of ESG Score

While ESG scores offer various benefits, they also come with risks that organizations need to manage effectively.

Firstly, data management and transparency is important. Organizations need to ensure accurate and reliable data collection, storage, and reporting to provide stakeholders with complete insight into their ESG performance.

Secondly, establishing clear metrics and methodologies for assessing ESG performance is crucial. This includes defining relevant indicators, setting performance targets, and regularly evaluating progress against these benchmarks.

Finally, internal governance plays a critical role in managing risk of ESG scores. Organizations need robust governance structures and processes in place to oversee relevant ESG initiatives, ensure accountability, and drive continuous improvement in ESG performance.

Why is it Important to HR Leaders?

To gain a deeper understanding of “what is an ESG score”, it is important to recognize the increasingly important role of HR leaders in managing the social aspect of ESG. Hence, incorporating ESG HR into your People strategy is pivotal.

Attracting and retaining talent

As mentioned earlier, ESG scores play a huge role in attracting and retaining talent. It is imperative to review and potentially update your HR policies and practices to stay ahead of the game when it comes to employee attraction and retention.

Understanding the concept of an ESG score and aligning with its criteria can further empower you to reshape your existing policies, thus fostering a more attractive environment for both current employees and prospective talents.

Shaping company culture

Company culture plays an important part in shaping employee experiences. With the growing emphasis on ESG HR efforts, HR leaders must adeptly manage employee relationships. Recent events such as the COVID-19 pandemic underscore the need for proactive engagement and support from HR in cultivating a positive company culture.

Read next: Strategies and Tools for Defining Culture in the Workplace

Aligning with stakeholder values

Aligning with stakeholder values is crucial for organizational success. By exploring the question, “what is an ESG score?” and embracing its principles, HR can pave the way to aligning company values with those of stakeholders. This alignment not only benefits the organization’s reputation but also fosters trust and credibility among stakeholders and employees.

Incorporating ESG Into Your People Strategy

Integrating ESG into your People strategy is vital for modern organizations. It aids in attracting and retaining top talent, shape a positive company culture, and ensure alignment with stakeholder values. HR leaders play a key role in managing the social aspects of ESG within this framework.

All-in-one HR software like Omni can be instrumental in this process by providing features such as comprehensive employee records, which allow for the analysis of workforce demographics and employee well-being, key aspects of ESG management.

Furthermore, our performance management module facilitates the integration of sustainability goals in performance evaluations. It also provides real-time analytics for data driven decision making, offering instant reports to monitor and incentivize employees towards achieving ESG objectives.

With a comprehensive suite of modules that cater to all aspects of your business, Omni’s intuitive and customizable platform seamlessly integrates with your team’s well-loved systems, facilitating a smooth and timely adoption of ESG principles into your company’s culture.

If you’d like to learn more about how Omni’s all-in-one HR software can bring your ESG commitment to the next level, book a demo with us today and start building a more sustainable and socially responsible organization!

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