Environmental, social and governance (ESG) data is important because it helps measure the sustainability, long-term viability and ethical standards of companies. In the last couple of years, we have seen the reporting of issues linked to sustainability increase in shareholder reports, bolstered by regulatory mandates and/or voluntary disclosure.
Data from 2022 shows that 98% of S&P 500 firms reported ESG data. Of these firms, 70% of them acquired some assurance on their ESG metrics. This is an increase from the 65% recorded in 2021.
Despite these positive strides, the accuracy of this data is still under scrutiny. A PwC survey conducted last year found that more than 90% of investors believe corporate sustainability reports contain unfounded claims. Overall, ESG scores are invaluable for evaluating and comparing the ethical performance and sustainability of companies, providing much-needed insight to consumers, investors and other stakeholders.
Below, we look at other things ESG scores can do and what they cannot.
So, what can these scores do?
Help mitigate risk
ESG scores call attention to possible risks, affording management time to act.
Assist companies in complying with regulations
These scores help to clearly communicate an organization’s ESG performance to regulators and stakeholders.
Investment analysis
These scores assist investors in identifying investments that align with their sustainability objectives while providing them with long-term value.
Help companies align with their corporate strategies
Organizations can also use ESG scores to identify areas for improvement in governance and sustainability.
Operational efficiency
ESG scores identify companies with effective sustainable practices, allowing them to save additional costs.
Encourage innovation
These scores also encourage and drive the development of sustainable services and products across industries.
What can’t ESG scores do?
Influence consumer behavior
While these scores are useful, they have a limited effect on consumer behavior.
Offer complete risk evaluation
ESG scores are only one aspect of comprehensive risk analysis.
Provide short-term financial forecasts
These scores are more suitable for long-term risk management.
Give future forecasts
The scores are based on both current and historical data, and they do not forecast future performance of an organization.
Provide assurance of ethical behavior
ESG scores only reflect publicly disclosed policies and practices.
Conduct systemic issue analysis
The scores primarily focus on individual organizations rather than broader issues in the society.
Demonstrate total performance of an organization
The scores don’t capture every aspect of an organization’s performance.
While ESG scores are useful in assessing companies, organizations may benefit from using them alongside other analytical techniques.
Each company, such as Aston Bay Holdings Ltd. (TSX.V: BAY) (OTCQB: ATBHF), has the task of deciding exactly what utility they wish to obtain from ESG scores and then tailor their software to accord greater emphasis on those parameters.
NOTE TO INVESTORS: The latest news and updates relating to Aston Bay Holdings Ltd. (TSX.V: BAY) (OTCQB: ATBHF) are available in the company’s newsroom at https://ibn.fm/ATBHF
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