Information Content Measurement of ESG Factors via Entropy and Its Impact on Society and Security

Abstract

We conducted a singular and sectoral vulnerability assessment of ESG factors of Dow-30-listed companies by applying the entropy weight method and analyzing each ESG factor’s information contribution to the overall ESG disclosure score. By reducing information entropy information, weaknesses in the structure of a socio-technological system can be identified and improved. The relative information gain of each indicator improves proportionally to the reduction in entropy. The social pillar contains the most crucial information, followed by the environmental and governance pillars, relative to each other. The difference between the social and economic pillars was found to be statistically not significant, while the differences between the social pillar, respective to the economic and governance pillars were statistically significant. This suggests noisy information content of the governance pillar, indicating improvement potential in governance messaging. Moreover, we found that companies with lean and flexible governance structures are more likely to convey information content better. We also discuss the impact of ESG measures on society and security.

Keywords

• applied systems analysis
• socio-technological systems
• entropy
• ESG
• sustainability
• society and security