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Widespread interest in the environmental, social, and governance (ESG) factors of organizations continues to grow rapidly. Stakeholders, particularly investors, combine these nonfinancial factors with financial results to analyze a company’s future performance and make investment decisions (called ESG investing).
ESG measures certain impacts of a company:
Many third-party vendors assign companies ESG scores. Although there’s no universal ranking system (making it difficult to compare scores from different vendors), most rating systems rely on a scale of 0 to 100. Generally, the higher the ESG score, the better a company is performing in all three areas and, therefore, is considered a stronger candidate for ESG investors. Conversely, a lower ESG score indicates a company is performing poorly in the three areas and, therefore, is less desirable to investors because of the increased risk to the bottom line. It’s important to note that sustainability and ESG are related but aren’t the same thing. Sustainability, in business terms, considers the connection between environmental considerations and social and financial effects. It focuses on managing a company’s triple bottom line of people, planet, and prosperity. ESG provides a framework for both implementing and measuring the strategies a business uses to achieve sustainability.
There is currently no legal requirement for public companies in the U.S. to disclose ESG matters, but many companies voluntarily publish annual ESG reports due to stakeholders’ increasing interest in ESG factors.
Environmental, Social, and Governance (ESG): Establishes criteria used by investors and in capital markets to evaluate and implement corporate environmental conscientiousness.
Sustainability: A holistic concept that looks at the connection between environmental considerations and social and financial effects. The World Commission on Environment and Development defines sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”
The Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce recommends these best practices for ESG reporting: