Only 20% of U.S. Companies Are Meeting ESG Standards

What is your opinion on the fact that only about 20% of American companies are meeting the required environmental and ESG standards? Is this sufficient, or is it too few?

In recent years, environmental, social, and governance (ESG) factors have become critical components of corporate strategies across the globe. As businesses are increasingly expected to manage not only their financial performance but also their environmental and societal impacts, many organizations are turning to ESG scoring mechanisms to assess their progress. This startling statistic raises important questions about the effectiveness of ESG evaluations, the challenges companies face in meeting these standards, and what can be done to improve sustainability practices across industries.

What Is ESG Scoring?

ESG scoring is a process through which a company’s environmental, social, and governance practices are evaluated. These scores, provided by various rating agencies, help investors, consumers, and other stakeholders gauge how well a company is performing in these non-financial areas. The idea behind ESG scoring is to create transparency, enabling stakeholders to make informed decisions based on both financial and non-financial data.

The scoring methodology varies among different agencies but generally includes a combination of public disclosures, data collection, and third-party assessments. Rating agencies include such as MSCI, Sustainalytics, and CDP among others. They have become pivotal in the ESG landscape, providing investors and companies with the tools to measure and improve their sustainability performance.

The Low Scoring of American Companies

Despite the growing emphasis on ESG criteria, a study on American companies showed that only 20% are meeting the established standards for sustainability.

This statistic is concerning for several reasons, especially when considering the global push toward a more sustainable future. For many companies, ESG scoring represents an opportunity to align with best practices and avoid the risks associated with poor environmental or social governance. Yet, the low compliance rate suggests a significant gap between the expectations set by scoring agencies and the reality of corporate behavior in the United States.

Several factors contribute to this disparity, ranging from a lack of awareness and resources to systemic challenges that hinder progress in achieving sustainable practices. Many companies face challenges in implementing environmental policies that align with the ever-changing ESG rating standards. Why? The continuous evolution of these standards, addressing emerging issues like biodiversity, supply chain resilience, and AI ethics, is undoubtedly a significant factor. However, the primary reasons may lie in a lack of awareness about the importance of ESG investing and an overemphasis on short-term profitability.

Because of The Lack of Trust?

You might be wondering, “Isn’t the low rate due to skepticism about the transparency or validity of ESG and a lack of clarity in the process?” Great question. As ESG’s significance continues to grow, the quality and reliability of certifications have also been steadily improving.

1. Standardization of Frameworks

• Organizations such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and Task Force on Climate-Related Financial Disclosures (TCFD) have established widely recognized frameworks. These frameworks have become benchmarks for consistency and transparency in ESG reporting.
• The International Sustainability Standards Board (ISSB), launched by the International Financial Reporting Standards (IFRS) Foundation, aims to create a global baseline for ESG disclosure, further enhancing standardization.

2. Increased Regulatory Oversight

• Governments and regulatory bodies are introducing mandatory ESG disclosures. For example:
  • The European Union’s Corporate Sustainability Reporting Directive (CSRD) mandates companies to report detailed ESG metrics.
  • The U.S. Securities and Exchange Commission (SEC) has proposed rules for climate-related disclosures, focusing on accuracy and consistency.
• These regulations push companies and certifying agencies to adopt more rigorous and credible practices.

3. Advancements in Verification Practices

• Third-party auditors and certification bodies, such as CDP (Carbon Disclosure Project) and S&P Global ESG Ratings, now employ more sophisticated methodologies to assess ESG performance, ensuring greater validity and transparency.
• Independent verification by firms like DNV or Bureau Veritas helps strengthen the credibility of ESG certifications.

Considering this, it is clear that companies cannot use the lack of transparency or trust as an excuse to avoid pursuing ESG investing.

The Role of Scoring Agencies in Driving Change

While the statistics on American companies’ ESG performance are concerning, scoring agencies play a critical role in driving improvements by providing a standardized system for evaluating corporate practices. By benchmarking companies against established criteria, these agencies help organizations understand where they fall short and where they can make improvements.

Some of the leading scoring agencies in the ESG space include:

1. MSCI ESG Ratings
   MSCI provides comprehensive ESG ratings across industries and companies. Their ratings range from “AAA” (the highest rating) to “CCC” (the lowest). MSCI’s framework includes over 40 key ESG indicators, such as greenhouse gas emissions, energy usage, and labor standards.
2. Sustainalytics
   Sustainalytics, a subsidiary of Morningstar, evaluates companies based on their ESG risk management strategies. They assess factors like environmental performance, human rights policies, and governance practices.
3. CDP (Carbon Disclosure Project)
   CDP evaluates companies’ efforts to disclose and manage their environmental impact, specifically focusing on carbon emissions, water usage, and deforestation. Companies that disclose their data through CDP are scored on their climate-related actions and their preparedness for future environmental challenges.
4. FTSE Russell ESG Ratings
   FTSE Russell provides ESG ratings based on criteria that include carbon emissions, water usage, waste management, and sustainable sourcing practices.
5. EcoVadis
   EcoVadis assesses companies on a broader range of sustainability criteria, from environmental impacts to labor practices and ethics.

Sustainalytics’ ratings are widely used by institutional investors and asset managers to identify high-risk investments. They play a key role in assessing companies’ alignment with long-term sustainability goals and guiding ESG-focused investment decisions.

Conclusion

The fact that only 20% of American companies meet ESG standards highlights the significant challenges that remain in achieving widespread sustainability in the corporate world. However, as we’ve seen, ESG scoring agencies are playing a vital role in driving progress by providing companies with the tools and frameworks to improve their environmental and social performance. As the world aims for carbon neutrality by 2050, companies must increasingly focus on their ESG scores. Strong environmental efforts, along with other sustainability initiatives, are becoming crucial for winning tenders and attracting new customers. At Carbon Da Capo, we assist companies and small businesses in offsetting their carbon footprint. We can help improve your ESG score through carbon credits. Feel free to reach out whenever you need us, and let’s make progress together!