ESG Ratings: A Benchmark For Performance
When it comes to ESG or sustainable investing, one burning question that institutional investors often have is how they can actually measure a company's ESG performance. Fortunately, the answer lies in the form of comprehensive ratings and scores provided by multiple renowned ESG data providers and rating agencies.
Although numerous organisations thought themselves as the be-all and end-all of ESG ratings, covering a plethora of parameters or ESG factors such as company declarations, media reports, controversies, investor risk, etc., it remains uncertain which provider is most reliable or detailed.
Also, we still need to determine the best way to compare ESG rating providers. What are the key ESG benchmarks? True, many debate whether it is wise to seek comparisons amid different ESG rating agencies, mainly due to their considerable variances in methodology, asset classes, and global reach, but those comparisons can better highlight the relative focal points of each agency ratings approach, helping companies choose the ESG ratings that apply best to their own needs.
The following are the leading ESG rating providers which have large market adoption of their products and services.
With over twenty years of expertise in the financial market, Sustainalytics came up with an ESG investor risk score with underlying environmental, social and governance risk ratings. The risk score ranges from 100 to 0, i.e., closer to 100 is high risk (bad score, red zone) and closer to 0 is low risk (excellent score, green zone). The ESG Risk Score comprises two dimensions:
Exposure: ESG-related risk factors which can cause a potential financial risk to companies. It can also be considered as a company's sensitivity or vulnerability to ESG risks.
Management: Considers how well a company is able to handle its material ESG risk.
Below is the actual scale of how Sustainalytics measures company ESG Risk:
With a history going back to 2002, the company promises and claims to provide one of the most thorough ESG datasets, encompassing more than 80% of the worldwide market value over more than 630 different ESG metrics. A Refinitiv ESG score ranges from 0 to 100, where closer to 100 is the better score a company can achieve. They also include a controversy score which is generated based on controversial ESG news events happening across the globe that relate to the specific company.
The below table showcases how the ESG scores are generated from the bottom to top approach:
The key focus of the MSCI ESG Ratings is to measure any given company and how they are managing financially relevant ESG risks and opportunities. MSCI is the first ESG provider to assess companies based on industry materiality, dating back to 1999.
Key highlights from the MSCI methodology based on MSCI ESG research are:
For each industry, on an annual basis, 35 key ESG issues and associated weights are identified, based on the MSCI Materiality Map framework which helps investment firms to access and reorganise their ESG investing goals.
Exposure Metrics: These determine how exposed a given company is to a material issue (based on more than 80 geographic and business segment metrics).
Management Metrics: Determine how a given company manages each material issue (based on 100+ governance key metrics, 20 performance metrics, and 150 policy metrics).
MSCI ESG Ratings are generated for ESG's underlying pillars of E, S, and G, the scale going from 0 to 10 where MSCI has given a specific category for each range, as shown below:
Being one of the major players in the global business and financial information and news leader, Bloomberg, in April 2020 launched Proprietary ESG Scores for Oil & Gas Industry. Initially, only for 252 companies, the scores were generated based on E & S scores, which gradually expanded to an index of 11,800 companies, updated to ESG Disclosure scores.
Bloomberg's approach to scoring ESG performance is characterised by a bottom-up, model-driven method driven primarily by self-reported, publicly available information that results in a fully transparent, parametric, rules-based scoring framework. The Bloomberg ESG Disclosure score comprises E, S, and G scores, and the scale ranges from 0 to 100, where a score near to 100 is the best score a company can achieve.
Bloomberg claims that the ESG data that they use for E & S scores consist of voluntary disclosures captured only from direct (primary) sources, in order to ensure accuracy and consistency with original corporate information. These sources include sustainability reports, annual filings, proxy statements, corporate governance reports, supplemental releases, and company websites.
Bloomberg's E & S Scores are divided into the following hierarchy: Pillars, Issues, Sub-Issues, and Fields. Each issue has a minimum of one sub-issue that collects related E & S data fields. Oil and gas sector pillars, issues, and sub-issues for E & S.
Below are the Bloomberg score parameters and issue priorities list for which scores are generated:
With an innovative collection approach, Dow Jones has captured a wide range of data on the Environment, Social, and Governance (ESG) profile for more than 6,000 worldwide corporations. Their sustainability score dataset is primarily generated using the Dow Jones Factiva news universe.
Dow Jones follows the SASB framework to generate the ESG aggregate score and five pillar scores: Environment, Social Capital, Human Capital, Business Model & Innovation, Leadership & Governance. The scores are generated using a bottom-up approach, where company news and company disclosures are collected and categorised into 26 SASB category scores, further divided into five pillar scores, from which, when including weighted financial materiality, an aggregate ESG score is generated.
The scale ranges from 0 to 100, where a score near 100 is the best score for a company.
The image below outlines how the Dow Jones score is generated:
Founded in 1985, the Institutional Shareholder Services group of companies (ISS) launched their proprietary ESG score in 1993 and recently launched its Regulatory Sustainable Investment solution as well.
ESG data and performance ratings are generated by the ISS ESG corporate rating. According to ISS, firms are evaluated against a predetermined list of general ESG themes as well as additional industry-specific subjects. They consider material sustainability risks as well as negative effects on society and the environment as part of their ESG rating framework. Out of 700 indicators, ISS ESG uses about 100 social, environmental, and governance-related indicators for each rating, and assigns scores for important metrics like employee concerns, supply chain management, business ethics, corporate governance, environmental management, eco-efficiency, and others.
The ISS ESG corporate rating uses a twelve-point grading system and the scale goes from A+/4.00 i.e. excellent performance to D-/1.00, i.e., poor performance.
The below image shows the ISS ESG Rating of a company:
The above insights also help in answering some common questions that institutional investors and portfolio managers come across during their investment process into their ESG portfolios.
Frequently Asked Questions
What is Refinitiv methodology to generate an ESG score?
Refinitiv is an ESG ratings provider with an independent ESG scoring methodology that is designed to provide consistent, accurate ratings for green bond issuers and other organisations looking to demonstrate their commitment to sustainability. Refinitiv ESG scores combine both quantitative analyses of publicly available information with qualitative assessments from a team of experienced analysts who specialise in environmental, social, and governance issues. This ensures that the rating reflects the most up-to-date information about a company’s sustainability practices while also taking into account any potential risks associated with green investments.
What is Sustainalytics ESG risk rating methodology?
Sustainalytics provides an independent ESG rating methodology that combines quantitative analyses of publicly available data with qualitative assessments from experienced analysts who specialise in environmental, social, and governance issues. This ensures that ratings reflect up-to-date information about a company’s sustainability practices while also taking into account any potential risks associated with green investments.
How does MSCI ESG Ratings work?
MSCI ESG Ratings is a rating system that assesses corporate sustainability performance using publicly available information. The rating takes into account a range of ESG topics such as climate change, green bonds, human rights, climate risk, gender equality and corporate governance. MSCI ESG Ratings uses an algorithm to perform the Climate Bonds Initiative (CBI) green bond rating, which is an independent assessment of green bonds and other climate-aligned financial instruments. The rating measures how effectively the green bond issuance meets CBI's criteria for green investments, with a focus on the use of proceeds and projects.
What is the S&P ESG score?
S&P Global Ratings (formerly Standard & Poor's) provides an independent ESG score, which is designed to measure the company's performance in ESG areas. The score takes into account over 20 ESG criteria including green bonds, climate risk, corporate governance, human rights, and gender equality, and is the Fitch ESG Relevance Score.
What is the ISS rating score?
ISS ESG Rating score is an independent rating approach that assesses a company’s sustainability performance using publicly available information. The ISS ESG Rating system uses a scale from A+/4.00 (excellent performance) to D-/1.00 (poor performance), incorporating GRI, SASB, and TCFD standards into their methodology, and generating disclosure scores in order to provide accurate ratings for green bond issuers and other organisations looking to demonstrate their commitment to sustainability.
What does ESG stand for in Bloomberg?
An extensive array of ESG ratings are crafted and distributed by a variety of rating providers, each with their unique perspectives in formulating the evaluations. It is noteworthy that these entities frequently adopt both voluntary and legally mandated conventions to enact more concise criteria for their assessments.
However, why did regulators not create a standard structure for ESG Ratings? The likely reply is that the immense control of these rating suppliers in the market; implementing regulatory standards at this stage could cause chaos akin to attempting to coordinate electric switch types within one house.
Without a unified ESG standard system, the possibility of greenwashing must be addressed. To prevent this from happening, greater transparency measures should be taken into consideration when it comes to data collection and the methodology used to generate results. If left unregulated in its current state, these safeguards are essential for keeping the ESG space honest.
Click here to find and compare the ESG reports and ratings of top companies across three leading ESG data providers: Sustainalytics, Refinitiv, and MSCI.
Note: This is an updated version of an article published here at www.knowESG.com on 26 July, 2022.