Environmental, Social, and Governance (ESG) - What It Really Needs To Measure Is Greed
ESG metrics and key performance indicators (KPIs) include a wide range of issues, such as carbon emissions, water usage, diversity and inclusion, human rights, and governance practices. As a quick rundown of ESG scores, environmental metrics may include a company's carbon footprint and energy efficiency, while social metrics may include labor practices and community engagement, with governance metrics including executive pay, board diversity, transparency, and integrity of transaction controls.
Obtaining ESG scores in a manner that is free from bias, whether political or profit, can be challenging. One way to ensure the integrity of ESG scores involves the use of third-party rating agencies, such as Sustainalytics or MSCI, that use standardized methodologies and are independently audited. These agencies use a combination of publicly available information and proprietary data to evaluate companies and assign scores.
It is probably worth providing a disclaimer that the use of "standardized methodologies" and "independently audited" assumes a strong foundation of trust in governing bodies, which unfortunately is not present in today's polarized and politically motivated environment we live in.
At any rate there are many organizations that are achieving exemplary ESG scores, such as Patagonia, a clothing company known for its commitment to sustainability and social responsibility. Similarly, Nestle, a multinational food and beverage company, has been recognized for its commitment to sustainability, water management, and responsible sourcing.
On the other hand, there are also organizations that have not performed well on ESG metrics, such as ExxonMobil, the oil and gas company, which has been criticized for its lack of action on climate change and its poor record on environmental and human rights issues. Another example is Goldman Sachs, an investment bank, which was criticized for its role in the 2008 financial crisis and its lack of transparency and pension for greedy revenue grabs.
Environmental Awareness
The environmental component attempts to measure a company's impact on the environment, including issues such as greenhouse gas emissions, energy efficiency, water management, and waste reduction.
Some examples of organizations that are allegedly scoring in the environment component consist of the following:
Patagonia the outdoor clothing and gear company, has long been recognized
for its commitment to sustainability and environmental stewardship. The
company has a number of initiatives in place to reduce its environmental
impact. For instance, the company has pledged to use only organic cotton, recycled polyester, and
other sustainable materials in its products. It has also implemented a
program to repair and recycle its products, reducing waste and increasing
the lifespan of its products.
Interface the global manufacturer of modular carpet, has set a goal to
become a "restorative enterprise" which means to eliminate any negative
impact it has on the environment. The company has developed a closed-loop
recycling program for its products and has also set ambitious goals for
reducing its greenhouse gas emissions.
Tesla, the electric vehicle and clean energy company, has been recognized
for its efforts to promote sustainable transportation and reduce carbon
emissions. The company's electric vehicles have significantly lower
emissions than traditional gas-powered cars, and the company also invests in
renewable energy sources such as solar and wind power.
IKEA the Swedish furniture company has taken a position of commitment to
sustainability from sourcing materials responsibly to designing products
that have a long life and can be recycled. The company has set ambitious
goals to become climate positive, meaning it will remove more greenhouse gas
emissions than it emits by 2030.
Unilever, a leading consumer goods company, has a long-standing commitment to sustainability and has set ambitious goals to reduce its environmental impact. The company has invested in renewable energy, water stewardship, and sustainable agriculture, and also has a range of environmentally friendly products under its brands.
Social Breakdown
The social component attempts to measure a company's impact on society, including issues such as labor practices, human rights, community engagement, and supply chain management.
Some examples of organizations that are allegedly scoring high in the social component consist of the following:
Costco, the retail giant, has been recognized for its commitment to fair labor practices and worker rights. The company is known for paying its employees higher wages and offering better benefits than many of its competitors.
Ben & Jerry's, the ice cream company, has a long-standing commitment to social and environmental justice. The company has been a vocal advocate for issues such as climate change and racial equity and has a number of initiatives in place to promote sustainable sourcing and fair labor practices.
Salesforce, the cloud-based software company, has been recognized for its commitment to diversity, equity, and inclusion in the workplace. The company has set ambitious goals to increase the representation of underrepresented groups in its workforce and has also invested in programs to support the professional development of employees from diverse backgrounds.
The Body Shop, a cosmetics company, has a long-standing commitment to social and environmental causes. The company has been a vocal advocate for issues such as animal rights, human rights, and environmental sustainability, and has a number of initiatives in place to promote ethical sourcing and fair trade practices.
Patagonia, the outdoor clothing and gear company, is committed to supporting fair labor practices and has established a Fair Trade Certified program to ensure that its products are made under fair and safe conditions. The company also donates 1% of its sales to environmental causes and supports a number of non-profit organizations that work to protect the environment.
Governance Component
Berkshire Hathaway, the investment holding company, is known for its strong corporate governance practices. The company is led by Warren Buffett, who is widely regarded as one of the most successful and ethical investors in the world.
Google, the technology giant, has been recognized for its strong corporate governance practices. The company has a clear and transparent organizational structure, and its board of directors is composed of a diverse group of individuals with a wide range of expertise.
Unilever, the consumer goods company, has been recognized for its strong corporate governance practices. The company has a clear and transparent organizational structure, and its board of directors is composed of a diverse group of individuals with a wide range of expertise.
Nestle, the food and beverage company, has a strong corporate governance structure, with a board of directors that is diverse and independent. The company has a clear and transparent organizational structure, and its board of directors is composed of a diverse group of individuals with a wide range of expertise. Ironically, while Nestle may get credit in their attempts of providing clean drinking water to impoverished areas without access to such, they also score low on environmental concerns with their abundance of plastic waste in their bottled water.
Microsoft, the technology company, has a strong corporate governance structure, with a board of directors that is diverse and independent. The company has a clear and transparent organizational structure, and its board of directors is composed of a diverse group of individuals with a wide range of expertise.
Scoring ESG Objectively
An organization's ESG score is typically obtained by using a combination of metrics and key performance indicators (KPIs). These metrics and KPIs are used to evaluate a company's performance on environmental, social and governance criteria.
For the Environmental component, metrics commonly used include carbon emissions, energy consumption, water usage, waste generation, and biodiversity impact.
For the Social component, metrics commonly used include labor standards, human rights, community relations, and health and safety.
For the Governance component, metrics commonly used include board structure, executive pay, proxy voting, and anti-corruption policies.
ESG rating agencies, research firms, and index providers use different metrics and KPIs to evaluate a company's performance. They also use different weighting systems and methodologies to combine the different metrics and KPIs into an overall score or rating. This can lead to variations in the scores and ratings provided by different agencies, research firms, and index providers.
Some agencies and research firms also use additional data sources such as news, regulatory filings, and company reports to supplement their analysis. Additionally, they also take into account the company's industry and sector, as well as the company's size, and its global presence.
It's worth noting that ESG ratings are not the only tool to evaluate a company's performance, and it's important to consider a variety of sources and to conduct your own research. It's important to consult professional ESG rating agencies or research firms, which provide a more detailed and nuanced analysis of a company's performance based on different ESG criteria and provide a more in-depth analysis.
While these are some examples of organizations performing well in certain aspects of the ESG, it is equally interesting to note that excelling in one component doesn't necessarily make up for performing poorly in other areas. For instance, it was previously mentioned that Nestle received high remarks for their work towards sustainability, water management, and responsible sourcing, unfortunately they receive plenty of negative feedback for their contribution to promoting the use of plastics that end up in the oceans and landfills.
Modernizing The Social Scoring Metrics
The current metrics used for evaluating a company's social performance within the ESG framework are focused mainly on labor standards, human rights, community relations, and health and safety. However, incorporating additional criteria such as compensation ratios, ratio of general and administrative costs, employee turnover, and philanthropy can provide a more comprehensive evaluation of the company's contribution to and stimulation of the local and national economies.
The compensation ratio between executives and entry-level positions can indicate the company's commitment to fair wages and equitable treatment of its employees. A higher ratio would indicate that executives are receiving a disproportionate amount of compensation compared to entry-level positions, which could raise concerns about the company's labor practices.
The ratio or percentage of general and administrative costs relative to net income as an indicator of the company's outsourcing or offshoring practices can also provide valuable information about the company's commitment to being a contributing factor to stimulating local and national economies. A lower ratio would indicate that the company is spending a higher percentage of its income on general and administrative costs, including labor practices, which could suggest that the company is outsourcing or offshoring jobs, potentially hurting local and national economies.
Measuring long-tenured employees or employee turnover can provide insight into the company's labor practices and overall work environment. A higher rate of long-tenured employees can indicate a positive work environment and a lower rate of turnover, while a higher rate of turnover can suggest dissatisfaction among employees and potentially negative labor practices.
Scoring the percentage relative to net income on the amount of philanthropy through services or charitable donations the organization commits to can indicate the company's commitment to giving back to the community and supporting local and national economies. A higher score would indicate that the company is committing a higher percentage of its net income to philanthropy, which could be seen as a positive sign of the company's commitment to social responsibility and support for local and national economies.
Incorporating these additional criteria into the evaluation of a company's social performance within the ESG framework could provide a more comprehensive view of the company's overall impact on local and national economies and help investors make more informed decisions about the companies they choose to invest in.
Comments
Post a Comment