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How is ESG Data Screening Becoming a Game Changer?
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ESG is becoming an important part of any business looking to comply with upcoming environmental regulations or develop overall improved sustainability efforts, but what about ESG data screening in particular?
ESG data screening is becoming an increasingly popular way for companies to demonstrate their transparency and ESG efforts to customers, investors, and stakeholders.
In this article, we’ll explain what ESG data screening is, why it’s important, some of the challenges of ESG data screening, and how your company can get started with it.
What is ESG data screening?
ESG data screening refers to the method of verifying that only sustainable options have been chosen on behalf of a company – such as sustainable funds or investments.
“ This type of data screening is often more information intensive as opposed to other types of data screening, making it a more in-depth confirmation of a company’s sustainability or ESG efforts. ”
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Think of when a future employee is to be screened for a background check in order to ensure they do not have a criminal record or are mentally and physically capable of doing the proposed job. ESG data screening serves the same purpose for companies when trying to determine whether they are truly exhibiting good ESG morale.
ESG data screening, sometimes referred to as sustainability screening, can be used for any company regardless of sector – but it is most often used for the following purposes:
- Sustainable funds such as ESG, ETF, impact, or sustainable sector funds;
- ESG index or indices, which help companies to closely monitor their ESG progress;
- ESG stocks.
👉 Ultimately, ESG data screening serves as a way to ensure companies are being honest about their sustainable efforts – most often when it comes to their financial activities and investments.
Why is data screening important to an organization?
Data screening is important to an organization as it allows for greater investor confidence, transparency, and helps to prevent a company from falling subject to greenwashing.
“ Even if ESG or sustainable policies aren’t on a company's radar, data screening can provide companies with the opportunity to be more proactive as opposed to reactive with the opportunity to alter their business model prior to the potential decision making of investors. ”
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There are several reasons why data screening is becoming an essential facet for businesses – here are just a few reasons why:
- Investor Confirmation – These days, given the massive uptick in interest in ESG policies, it can be hard for investors to truly believe companies solely based on their word if they are following truly viable sustainable practices. Therefore, ESG data screening helps to confirm if a company is being honest – or merely bending the truth in hopes of receiving financial aid.
- Avoids Greenwashing – One of the biggest challenges in the midst of a greater push for sustainability and ESG endeavors, many companies may find themselves falling subject to greenwashing. Luckily, ESG data screening can help verify a company and their ESG efforts to allow investors to trust them more easily – very much in the same way a passenger walking through airport security can confirm to their fellow passengers that they are safe to travel with.
- Allows for Improvement – Think about going through airport security, and getting stopped for something in your backpack – even if it be something as trite as a liquid over the predetermined limit. In the end, while annoying, this event helped to ensure in the future that your bag is better prepared for security next time to ensure a smoother process. The same goes for ESG data screening, as it can highlight inconsistencies or potential setbacks in a company that could result in them being viewed as “un-investable” to future investors.
- Provides Direction for Fund Managers – The companies that do not receive good results in their ESG data screening are likely to find themselves inspired to change their current financial behaviors and overall efforts towards environmental reform. This is because seeking to improve their future ESG data screening can ensure that the company can perform better financially in the future and in the long-run – seeing as businesses are more bound to have long-lasting success when seeking to implement sustainable efforts.
👉 As a result, the benefits of data screening often can encourage improved business behaviors that can prove efficacious for long-term business success in the future.
What are the different types of ESG data screening?
The two different types of ESG data screening include positive screening and negative screening – and the type of data screening to be used on the company in question is often based on preference seeing as both types of data screening are conceptually similar.
Here are the differences between the two different types of data screening that can be used for ESG purposes:
- Exclusionary Screening or Negative Screening – Sometimes referred to as exclusionary screening, this type of data screening concerns ethical values such as alcohol, tobacco, child labor, forced labor, animal cruelty and gambling. This can also include companies that create an undeniable environmental impact such as polluting the air or deteriorating the water quality.
👉 Although negative screening is often viewed as the more pessimistic approach to ESG data screening, it is more likely to encourage adjustments to a business model as opposed to positive screening – as it reveals what a company can improve upon.
“ Ultimately, negative data screening will seek to ensure companies are avoiding investments that engage in these behaviors – very much in the same way an automatic exam-grader will mark an incorrect answers wrong as opposed to revealing the correct ones. ”
- Positive Screening – The other type of ESG data screening used is called positive screening, which reveals all of the beneficial, or “positive” companies your enterprise is currently associated with or investing in – essentially, allowing other stakeholders to receive confirmation on the good activities your company participates in.
“ Think of setting up a hall-of-fame for a sports team at a high school in the hallway. Surely, the high school would want to demonstrate all of the exceptional achievements that their sports teams have accomplished as opposed to their lows. Positive data screening works in the same way, as instead of revealing any faults – only the pros are illustrated. ”
👉 The main difference between negative and positive data screening is that negative data screening highlights all of the downsides of a company’s ESG endeavors while positive data screening reveals all of the good things a company is currently doing to accelerate their transition in sustainability.
What are some of the challenges of ESG data screening?
Some of the challenges of ESG data screening include being unable to control the type of data screening companies may choose to verify their ESG endeavors and difficulties in confirming the information with the company’s suppliers.
“ The problem with the two antithetical options for ESG data screening is that each one presents the company in an entirely detrimental or beneficial way – with no room for a middle ground in between. ”
Companies that make use of positive data screening can show off their good side to potential investors, whereas companies that choose negative data screening will demonstrate their transparency – but perhaps leave their successes behind in the process. This makes it difficult for investors to get a full-scope of a company, unless both types of data screening techniques are used.
Another issue with ESG data screening is that suppliers may not be considered in the screening process, which presents room for error – seeing as suppliers often account for the bulk of emissions or the overall environmental impact for any company. In addition to this, it can prove difficult to make contact with each and every supplier associated with the company undergoing the screening process.
👉 Overall, is it important for investors to remember that ESG data screening may not be the simple, black-and-white straight forward answer they are looking for when seeking confirmation for the green light to invest in a company.
How can your company get started with ESG data screening?
Your company can get started with ESG data screening by seeking to improve your current ESG score, sustainability rating, or altering the current investors or enterprises your company is associated with.
“ Getting started with ESG data screening means that companies should take a genuine interest in seeking to improve their current environmental, governmental, and societal factors. ”
Here are a few of the ways your company can improve its chances in ESG data screening:
- Implement the Use of Renewable Energy – Whether it be installing solar panels or switching the appliances in the office to be more energy efficient, this is a mechanism that proves useful regardless of which type of data screening your company commits to.
- Switch to Sustainable Finance – From green bonds, ESG funds, to impact investing – there is a wide array of sustainable investment options available to help your company seek more ESG data-screening-friendly financial activities.
- Collaborate with Your Community – Two heads is always better than one. Seeking to collaborate with other businesses in your company’s vicinity, especially those committed to achieving greater sustainability and ESG recognition as well, can really help to solidify your positive impact and ultimately – improve your chances at a better ESG score in data screening.
As the world continues to shift to greater sustainability and even low-carbon economies, it is becoming more imperative than ever for companies to partake in sustainable investments to help ensure a good ESG score when partaking in data screening – as investors continue to grow interested in not just how much money a company can make, but the kind of difference they can make in the world.
What about Greenly?
If reading this article on data screening has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!
Keeping track of how data screening could impact your business can be confusing, but don’t worry – Greenly is here to help! Click here to schedule a demo to see how Greenly can help you comply with all of the upcoming regulations relevant to your company.
Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.
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