Corporate boards of directors must tackle questions about sustainability in a new and urgent manner. If they don’t, they will hear from investors about their lack of action. In just the latest indication of the investor community’s increasing scrutiny on sustainability, Yahoo announced in 2018 that it would start publishing sustainability ratings for publicly traded companies. In order to fulfill their obligations, every listed company board must now become “sustainability fluent.” A first step is an understanding of sustainability/ESG scores—how they are derived, what they reveal, and how they should be used by various corporate stakeholders. Here is a guide to these scores and what they mean for directors.
What Boards Need to Know About Sustainability Ratings
Corporate boards of directors must ask questions about sustainability in a new and urgent manner. If they don’t, they will hear from investors about their lack of action. In just the latest indication of the investor community’s increasing scrutiny on sustainability, Yahoo announced in 2018 that it would start publishing sustainability ratings for publicly traded companies. In order to fulfill their obligations, every listed company board must now become “sustainability/ESG fluent. A first step is an understanding of the sustainability scores—how they are derived, what they reveal, and how they should be used by various corporate stakeholders. Here is a guide to these scores and what they mean for directors.
Sustainability scores are externally generated by third parties and are based on company disclosures in three distinct ESG categories—environmental impact, social impact, and governance. Generally, the more a company discloses, the higher the ESG score it receives, transparency being part of good governance and making corporate behavior more measurable. Why should boards care about these scores? For investors, asset managers and consultants, sustainability/ESG scores allow for a quick assessment of how well a company is run. For potential and existing company customers, strong scores could encourage purchasing by sustainability-minded consumers. For employees, robust scores can represent pride and engagement. Boards need to know, review, and track their companies’ sustainability ratings; they must understand how they were derived and how are reported on a regular basis by the various rating services.