# Preventing poor ESG practices from costing you investors
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-03-14
Category: INVESTING
Category URL: https://financedigest.com/category/investing
Meta Title: ESG Scoring and Reporting: The Key to Attracting Investors
Meta Description: Discover how to navigate ESG scoring, improve reporting, and stay ahead in the evolving landscape of sustainable investing. Stay informed and attract investors!
URL: https://financedigest.com/preventing-poor-esg-practices-from-costing-you-investorshtml

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_By_ **_Leas Bachatene,_** _CEO_ [_ethiXbase_](https://ethixbase.com/anti-bribery-and-corruption-questionnaire)

The 2020s have catalysed the momentum towards Environment, Social and Governance (ESG) practice and enforcement. The importance of protecting people and the planet, and the role that businesses play in this has never been more high profile. Both seasoned and beginner investors are increasingly choosing funds with more sustainable stocks, rewarding companies that are incorporating broader environmental and sustainability metrics in their decision-making. By 2025, Bloomberg calculates that global ESG assets will exceed [$53 trillion,](https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/) representing more than a third of the $140.5 trillion in projected total assets under management. Here’s what you need to know to get ahead of the curve and to ensure your business [remains attractive to investors](https://www.financedigest.com/6-months-to-go-until-brexit-and-investor-sentiment-remains-bold.html "6 months to go until Brexit and investor sentiment remains bold").

**How is [ESG measured](https://www.financedigest.com/measurement-is-key-if-the-circular-economy-is-to-attract-more-esg-investment.html "Measurement is key if the circular economy is to attract more ESG investment") and scored?**

Though there remains some discretion as to the exact scoring methodologies and frameworks governing ESG scoring and rating processes, some best practices have emerged. In most cases, ESG rating agencies [rate companies based on information gathered from multiple sources including a company’s own data](https://www.financedigest.com/shares-slip-yields-rise-as-u-s-data-sparks-rate-hike-concerns.html "Shares slip, yields rise as U.S. data sparks rate hike concerns"), Government data banks, the media, NGOs and other stakeholders. Questionnaires may also be used to gather further [information from companies](https://www.financedigest.com/healthcare-information-systems-market-2021-global-leading-companies-analysis-revenue-trends-and-forecasts-2027.html "Healthcare Information Systems Market 2021 Global Leading Companies Analysis, Revenue, Trends and Forecasts 2027").

Verifiable [ESG disclosures are expected to adhere to a specified set](https://www.financedigest.com/green-bonds-are-set-to-drive-corporate-esg-debt-out-of-slump-in-2023-barclays.html "Green bonds are set to drive corporate ESG debt out of slump in 2023 -Barclays") of mandatory and voluntary requirements as stipulated by standards agencies, including the GRI. Until ESG scoring becomes comprehensively legislated, the emphasis lies with [businesses to be transparent about their practices](https://www.financedigest.com/5-practical-ways-to-manage-your-business-expenses.html "5 Practical Ways To Manage Your Business Expenses"). This allows stakeholders to compare performance, gain a clear picture of a company’s direction, and make long-term beneficial decisions.

However, as an increasing number of business-relevant legislative Acts are passed, such as the Modern Slavery Acts in the UK and Australia or the more recent Lieferkettensorgfaltspflichtengesetz (LkSG) in Germany, it’s more important than ever for businesses to start viewing ESG scoring as a mandatory [business process](https://www.financedigest.com/automating-business-processes-is-essential-to-digital-transformation.html "Automating business processes is essential to digital transformation").

**How to improve your** [ESG reporting?](https://www.financedigest.com/how-distributed-ledger-technologies-are-transforming-esg-reporting-for-financial-intermediaries.html "How Distributed Ledger Technologies are transforming ESG reporting for Financial Intermediaries")

The first step to achieving good ESG reporting is to have a reliable, sustainable [business framework in addition to choosing the right metrics](https://www.financedigest.com/5-fx-metrics-your-business-should-be-tracking.html "5 FX METRICS YOUR BUSINESS SHOULD BE TRACKING"). Taking steps that are recognised as being key to your company’s operation will shine through in [ESG performance](https://www.financedigest.com/esg-investing-does-that-mean-sacrificing-performance-is-the-uk-the-right-place-and-how-to-do-it-properly.html "ESG Investing – Does that mean sacrificing performance? Is the UK the right place? And how to do it properly"). This starts with integrating ESG [data and an ‘ESG mindset’ into everyday business](https://www.financedigest.com/5-simple-ways-to-prevent-a-data-breach-from-putting-your-accountancy-practice-out-of-business.html "5 Simple ways to prevent a data breach from putting your accountancy practice out of business") operations. Having this mindset will enable your organisation to create a platform for further enhancements in internal and [supply chain](https://www.financedigest.com/ges-investors-seek-solutions-to-renewable-energy-supply-chain-challenges.html "GE’s investors seek solutions to renewable energy, supply chain challenges") activities.

Frequently reporting on processes used to [meet ESG](https://www.financedigest.com/esg-innovation-allowing-everyone-to-meet-the-standard.html "ESG innovation: Allowing everyone to meet the standard") goals as well as any remediation action and methodologies that have been taken to improve your operations will help make accurate ESG judgments. Identifying exactly how your [business is going to achieve your ESG goals is important](https://www.financedigest.com/software-to-display-your-businesss-important-information.html "Software to Display Your Business’s Important Information") to stay on top of. Analytics and [data visualisation play a key](https://www.financedigest.com/sterling-edges-lower-ahead-of-key-data.html "Sterling edges lower ahead of key data") role in this and can help your organisation identify which areas of your business need improvements.

Identifying the ESG gap in your [supply chain is crucial and can be the difference between failure and long-term success](https://www.financedigest.com/5-steps-to-successful-supply-chain-finance.html "5 Steps to successful supply chain finance"). It’s fast becoming a fundamental [business requirement to be able to prove that you are measuring authentic sustainability and social impact with genuine continuous improvement to gain trust](https://www.financedigest.com/trusting-your-gut-how-to-harness-the-power-of-your-business-instincts.html "Trusting your gut: how to harness the power of your business instincts") and recognition in the market. Those that act now will reap the benefits, but those that [delay will count the costs](https://www.financedigest.com/britain-delays-major-rail-project-hs2-as-costs-soar-again.html "Britain delays major rail project HS2 as costs soar again") of inaction.

**How can ESG** [ratings impact your stock?](https://www.financedigest.com/uk-stocks-slip-as-rate-hike-worries-grip-investors.html "UK stocks slip as rate hike worries grip investors")

There is a wealth of benefits in having robust ESG policies and credentials. A high ESG score correlates to increased profits. According to the [MSCI World Index](https://economictimes.indiatimes.com/blogs/et-commentary/esg-a-marathon-not-a-sprint/), the average cost of capital of the highest ESG-scored quintile was 6.16%, compared to 6.55% for the lowest ESG-scored quintile. For investors, companies with good ESG scores are thought to be well prepared to [deal with future challenges](https://www.financedigest.com/how-to-deal-with-challenging-employees.html "How to Deal With Challenging Employees?"), foresee beneficial opportunities, make better long-term decisions, and provide investors with a lower risk rating in times of uncertainty.

Conversely, a company that has a poor ESG score or has not implemented an ESG policy can experience significant [financial and reputational impacts](https://www.financedigest.com/how-mifid-ii-will-impact-financial-advisor-communications.html "HOW MIFID II WILL IMPACT FINANCIAL ADVISOR COMMUNICATIONS"). This will ultimately damage the trust of [consumers and investors](https://www.financedigest.com/investors-warn-big-consumer-firms-over-price-hikes-as-competitors-gain.html "Investors warn big consumer firms over price hikes as competitors gain"), which can lead to reduced sales, funding, and investment.

**Is [ESG just another investment](https://www.financedigest.com/esg-investing-what-is-the-regulatory-position-in-2022.html "ESG investing – what is the regulatory position in 2022?") fad?**

In short, no. Although ESG [Investing has grown exponentially in recent years](https://www.financedigest.com/liverpools-new-chinatown-perfectly-positioned-for-property-investment-this-chinese-new-year.html "Liverpool’s New Chinatown perfectly positioned for property investment this Chinese New Year"), with 2021 being a record year, it is only going to increase momentum. Companies that consider their [ESG impacts](https://www.financedigest.com/non-finance-data-sets-increasingly-sit-at-the-heart-of-investment-with-over-70-of-decisions-impacted-by-esg-factors-bright-data-research-reveals.html "Non-Finance Data Sets Increasingly Sit At The Heart Of Investment With Over 70% Of Decisions Impacted By ESG Factors, Bright Data Research Reveals") are seen to be more resilient in times of crisis or legislative change.Although ESG is considered a “hot-topic” right now, very few changes have been made due to legislative requirements and most is voluntarily undertaken. Forward-thinking businesses that take the initiative and demonstrate to [investors that a thorough SWOT analysis has been conducted and action taken will prove themselves to be an attractive and low-risk stock for potential investment](https://www.financedigest.com/why-are-investors-checking-out-of-uk-buy-to-let-and-checking-in-to-hotel-investment.html "WHY ARE INVESTORS CHECKING OUT OF UK BUY-TO-LET AND CHECKING IN TO HOTEL INVESTMENT?"). Increasingly, financial institutions are starting to display ESG [ratings along with stock](https://www.financedigest.com/stocks-euro-gain-amid-divergent-fed-ecb-rate-hike-outlooks.html "Stocks, euro gain amid divergent Fed, ECB rate hike outlooks") listings too, further demonstrating the growing demands of investors. With further ESG legislation on the horizon, ESG will be seen as a business imperative, and it pays to get ahead now.


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