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Sustainable Business

This guide is a compilation of resources on sustainable business, including ESG (environmental, social, governance) rankings and corporate social responsibility.

What is ESG?

At its simplest, ESG is a framework for analyzing the environmental, social and governance practices of a company or industry. ESG isn't quite the same as socially responsible investing though--it is more of a risk-management strategy. That is, it evaluates how the environmental, social and governance factors of a company will affect its future performance. 

Environmental: can refer to greenhouse gas emissions, management of natural resources, and overall resiliency against climate risks such as flooding or excessive heat

Social: can refer to wages and employee relationships in addition to the relationship the company has with the community in which it's situated

Governance: refers to how the company is run and managed, for example, what is the CEO-to-worker pay ratio?

 

ESG Ratings

Investors use ESG ratings to guide them in selecting companies that are socially responsible, which is a strategy that has grown in popularity over the past couple of decades. While there are many sustainability-related ratings, rankings and awards (over 100 as of the time of writing), keep in mind that rating companies in terms of their ESG metrics  is both relatively new and extremely challenging. Some issues with this field are: 

  1. Some ESG ratings agencies also offer consulting services to the companies they rate on how to improve their scores, which is a conflict of interest
  2. The ratings often contradict one another. Sometimes this is because they're weighing different objectives differently but sometimes this happens because they're using different underlying data 

To mitigate this, it can be helpful to consult multiple different ratings and look for the commonalities among them. A handful of ratings companies are listed below. Note that AU doesn't have access to all of them. This is also a great overview of the many different frameworks and ratings, as is this chart compiled by Edward Lim, the Business & Entrepreneurship Librarian at University of Connecticut. 

Another great resource is ERM's Rate the Raters report, which you can download from their website. ERM is a sustainability advisory firm. 

ESG Frameworks

ESG Frameworks help companies decide what to report in their disclosures, so that they can be rated for investors.