Exploring ESG Ratings: Key Factors Influencing Business Sustainability Scores

The ESG Rating, or Environmental, Social, and Governance assessment, is a critical tool for reflecting a business's sustainability. It plays a significant role in risk management and transparency, which in turn influences investor and stakeholder confidence. Additionally, it serves as a benchmark for comparison with competitors and helps attract funding from sources that prioritize sustainability.

What is an ESG Rating?

An ESG Rating is an assessment of a company's performance in environmental, social, and governance (ESG) areas. Its purpose is to measure the sustainability and social impact of a business. The rating covers three main components:

Environmental: Evaluates resource management, greenhouse gas reduction, and environmental impact.
Social: Assesses employee treatment, workplace safety, and community responsibility.
Governance: Measures transparency in management, board structure, and business ethics.

ESG Ratings are typically presented as scores or levels, such as AAA to CCC or on a 0-100 scale, depending on the rating agency. Notable global ESG rating providers include:

MSCI: Provides grades from AAA (best) to CCC (worst).
Sustainalytics: Scores ESG risk on a scale from 0 to 100, where lower scores indicate lower risk.
FTSE Russell: Rates ESG from 0 to 5, with 5 representing best practices.

In Thailand, the Stock Exchange of Thailand has partnered with FTSE Russell to elevate the ESG evaluation of Thai-listed companies to international standards, with public ESG scores to be announced starting in 2026.

An ESG Rating not only reflects a company’s sustainability performance but is also a valuable tool for investors to assess long-term business risks and opportunities. Additionally, it helps companies identify strengths and weaknesses in ESG operations to support continuous improvement.

The Importance of ESG Rating for Businesses

The ESG (Environmental, Social, and Governance) Rating is critically important for businesses today as it impacts various dimensions:

Attracting Investors: Companies with a high ESG Rating tend to attract more investors, especially institutional investors who prioritize sustainable investments. Investors often use ESG Ratings as a tool to assess long-term risks and business opportunities.
Access to Capital: Companies with strong ESG performance have an easier time accessing capital and may receive better terms, such as lower interest rates on loans.
Expanding into New Markets: A strong ESG Rating enhances a company’s credibility and reputation, making it easier to enter new markets, particularly those that emphasize sustainability.
Risk Management: ESG assessments help companies identify and manage risks related to the environment, society, and governance more effectively, reducing the likelihood of incidents that could negatively impact the business.
Improving Operational Efficiency: ESG evaluation processes allow companies to identify operational strengths and weaknesses, leading to process improvements and overall efficiency gains.
Creating a Competitive Advantage: Companies with high ESG Ratings often have a favorable image among consumers and business partners, which can lead to increased market share and competitive advantage.
Regulatory Compliance: Focusing on ESG helps companies better comply with environmental and social regulations, reducing the risk of penalties or fines.
Enhancing Brand Value: A high ESG Rating boosts the reputation and credibility of a brand, an intangible asset of great value to businesses.
Attracting and Retaining Talent: Companies with strong ESG performance often attract and retain skilled employees more effectively, particularly among younger workers who prioritize working for socially and environmentally responsible organizations.
Preparing for the Future: Emphasizing ESG enables companies to be better prepared for future challenges, such as climate change or shifts in consumer behavior.

For these reasons, ESG Rating is not just a tool for measuring sustainability performance but a crucial factor influencing a company’s long-term success and viability.

Factors Influencing ESG Evaluation Scores

The factors influencing ESG (Environmental, Social, and Governance) evaluation scores are divided into three main areas:

Environmental Factors:

Greenhouse Gas Management: Companies with clear plans and targets for reducing greenhouse gas emissions score higher.
Renewable Energy Use: Investment in clean energy and increasing the proportion of renewable energy use positively impacts ESG scores.
Reduction of Natural Resource Use: Key factors include water conservation measures, efficient use of raw materials, and recycling efforts.
Waste and Pollution Management: Efficient waste management systems and efforts to reduce air and water pollution help improve environmental scores.

Social Factors:

Labor Rights and Worker Welfare: Fair wage policies, appropriate benefits, and respect for labor rights are crucial factors.
Diversity and Equality within the Organization: Promoting gender equality, hiring people with disabilities, and implementing anti-discrimination policies positively affect ESG scores.
Community Engagement and Social Initiatives: Community development projects and efforts to create shared value with society enhance social scores.
Employee Health and Safety: Measures to prevent workplace accidents and ensure employee health are essential factors.

Governance Factors:

Board Governance and Transparency: A diverse, independent board structure and transparent information disclosure contribute positively to ESG scores.
Regulatory Compliance: Strict adherence to laws and regulations is a fundamental requirement.
Anti-Corruption Policies and Risk Management: Strong anti-corruption measures and an effective risk management system help improve governance scores.

Additionally, consistent ESG data reporting and external audits increase credibility, positively affecting the overall ESG evaluation score.

How to Improve ESG Rating Scores?

Improving an ESG (Environmental, Social, and Governance) Rating score is an ongoing, systematic process. Key steps include:

Analyze the Current Status: Conduct a thorough assessment of the organization’s ESG performance using self-assessment tools or external consultants to identify strengths and weaknesses.
Set Goals and Strategies: Establish challenging but achievable goals for each aspect of ESG. Develop both short- and long-term strategies to reach these objectives.
Integrate ESG into Business Processes: Incorporate ESG principles into product and service development, optimize work processes, and define organizational policies.
Develop Data Collection and Reporting Systems: Build effective systems to consistently gather ESG data and report results transparently and regularly.
Engage Stakeholders: Organize activities and communications to foster ESG understanding and involvement among employees, customers, suppliers, and the community.
Leverage Technology and Innovation: Utilize technology to reduce environmental impact, such as renewable energy or AI systems to improve resource efficiency.
Enhance Collaborations and Partnerships: Build alliances with other organizations, both within and outside the industry, to exchange best practices and jointly address ESG challenges.
Adopt International Standards and Certifications: Follow internationally recognized standards, like ISO 14001 for environmental management or SA8000 for social responsibility.
Continuously Review and Improve: Regularly review ESG performance and adjust plans to stay aligned with evolving conditions.
Use ESG Monitoring Tools: Implement ESG monitoring and analytics tools, like real-time ESG performance dashboards or ESG risk analysis software.

Examples of Best Practices in Various Industries:

Manufacturing: Use renewable energy, reduce waste through circular economy principles, and develop a sustainable supply chain.
Finance: Develop financial products supporting environmental projects, disclose climate risk data, and promote inclusive access to financial services.
Retail: Reduce plastic use in packaging, promote sustainably produced products, and launch impactful social responsibility programs.

Improving an ESG Rating isn’t just about scoring higher; it’s about fostering genuine organizational sustainability. This approach benefits business long-term by reducing risks, creating new business opportunities, and enhancing competitiveness.

ESG Ratings in Thailand

The Thai capital market is entering a new era of sustainable investment, with a growing focus on promoting Environmental, Social, and Governance (ESG) principles. Institutions and organizations are increasingly supporting and initiating projects to promote ESG investments.

The Stock Exchange of Thailand (SET) plays a critical role in promoting ESG by developing SET ESG Ratings to assess the ESG performance of listed companies. In 2023, 193 companies were selected and recognized as part of the SET ESG Ratings, representing 72% of the total market value of SET and mai.

Additionally, SET has introduced the Thailand Sustainability Investment (THSI) index to encourage investment in companies with strong ESG performance. SET also manages Corporate Governance Scoring (CG Scoring), which evaluates and ranks listed companies based on corporate governance principles.

The government supports sustainable investment policies, such as issuing Sustainability Bonds to raise funds for environmentally and socially beneficial projects.

In the private sector, several asset management companies have launched ESG funds to meet investor demand, particularly from institutional investors like pension funds seeking sustainable assets.

An example of a Thai company with a high ESG rating is the PTT Group, which is included in the global DJSI sustainability index. Although it operates in an environmentally risky industry, the group has robust risk management policies that enhance investor confidence.

Key factors contributing to higher ESG ratings for Thai companies include:

Transparent and comprehensive ESG data disclosure
Clear ESG targets and strategies
Integration of ESG into business processes
Development of eco-friendly innovation and technology
Community and social engagement

However, ESG assessment in Thailand faces limitations, such as a lack of reliable data and limited understanding of ESG principles among small and medium-sized enterprises (SMEs). Thus, increasing awareness and education on the importance of ESG is crucial to advancing Thailand's capital market towards long-term sustainability.

Challenges in Maintaining an ESG Rating

Maintaining a high ESG (Environmental, Social, and Governance) rating is a significant challenge for businesses, involving various issues and obstacles:

Changing Standards and Evaluation Criteria: ESG standards are constantly updated to align with current circumstances, requiring companies to adapt continuously. The need to review and update assessment criteria annually compels companies to closely track these changes.
Complexity of ESG Data: Collecting and reporting comprehensive and accurate ESG data is challenging, especially for smaller companies with limited resources. The lack of an efficient data management system can impact the quality of disclosed information.
Integrating ESG with Business Strategy: Truly embedding ESG into core business operations is a key challenge. Many companies still view ESG as an additional activity rather than a critical component of their corporate strategy.
Risk of Greenwashing: Overstating or misrepresenting ESG performance can lead to accusations of greenwashing, which can harm a company’s reputation and credibility. Striking a balance between showcasing achievements and maintaining transparency is essential.
Regulatory Changes: Governments and regulatory bodies frequently introduce new ESG-related laws and regulations, such as climate disclosure laws. Companies must adapt and invest to comply with these new requirements.
Rising Stakeholder Expectations: Investors, customers, and society increasingly expect strong ESG performance from companies, making it more challenging to maintain high ESG ratings.
Conflict Between Short- and Long-Term Goals: ESG investments typically yield long-term returns but can affect short-term financial performance, creating challenges in balancing these priorities.
Lack of Expertise: Implementing ESG initiatives requires specialized personnel, who are still scarce in the labor market.
Challenges in Measuring Impact: Quantifying the outcomes and impacts of ESG projects is difficult, particularly in social and environmental areas, making it challenging to demonstrate the value of these investments.
Supply Chain Management: Controlling and promoting ESG practices throughout the supply chain is a significant challenge, especially for companies with a vast and globally dispersed supplier network.

Maintaining a high ESG rating thus requires strong commitment, continuous investment, and rapid adaptation from businesses to address these challenges and meet society's rising expectations.

Summary: ESG for Sustainability

The ESG Rating plays a crucial role in driving businesses toward sustainability, serving as a tool to reflect an organization’s environmental, social, and governance practices. Beyond being a benchmark for investors, it also enables companies to clearly identify strengths and areas for improvement.

Focusing on ESG not only helps mitigate business risks but also opens new growth opportunities. Companies with high ESG scores often perform better in the long run. For example, a study by Moore Global found that companies prioritizing ESG achieved an average profit increase of 9.1% during the COVID-19 pandemic, compared to 3.7% for companies that did not prioritize it.

For businesses aiming to strengthen their ESG initiatives, the following recommendations are suggested:

Integrate ESG into corporate strategy: ESG should not be treated as an add-on activity but should be embedded within core business operations.
Develop data collection and reporting systems: Establish efficient systems for collecting and transparently reporting ESG data on a regular basis.
Engage stakeholders: Organize activities and communications to build understanding and participation in ESG matters across all sectors.
Utilize technology and innovation: Leverage technology to reduce environmental impact and increase operational efficiency.
Foster collaboration and partnerships: Build networks for sharing best practices and addressing ESG challenges collectively.

In Thailand, the push for ESG adoption is gaining attention. The Stock Exchange of Thailand has developed the SET ESG Ratings to evaluate listed companies' ESG performance. However, challenges remain in fostering understanding and practical ESG adoption, especially among small and medium-sized enterprises.

Ultimately, ESG development is not just about achieving higher scores but about creating long-term value for businesses, society, and the environment. Companies that can effectively integrate ESG into their operations will gain a competitive edge and foster sustainable growth over the long term.

Reference:

https://www.esgprothai.com/content/29452/esg-rating-esg-rating-คือ-ทำไปเพื่ออะไร
https://setsustainability.com/download/b3nfyvgdt2jrch1
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https://www2.spu.ac.th/award/34693/academic
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