ESG Ratings - True or False
Both large organisations and small and medium-sized businesses are looking for strategies that will increase their ESG ratings, also known as ESG ‘scores’. ESG performance is gaining importance for organisations all over the world as a means of attracting customers, investments, and maintaining regulatory compliance. The majority of them aim to be listed with well-known ESG rating providers, including S&P Global, Dow Jones Sustainability Index (DJSI), Sustainalytics, Refinitiv, and Morgan Stanley Capital International (MSCI).
However, many companies are ‘greenwashing’ potential investors and clients into thinking that their organisations are committed to ESG in the race to be seen earning the best ESG score. What, therefore, accounts for some businesses' high ESG scores as opposed to those that are only greenwashing?
This focuses on revealing data about a company's risks and operations in three categories: corporate governance, social responsibility, and environmental stewardship. Consumers or customers use ESG reports to determine whether their purchases are supporting a business that commits to certain ESG values. Therefore, the private sector’s commitment to transparently communicating progress in its sustainability initiatives to stakeholders is demonstrated via an ESG report.
What Is Reported?
Factors that directly affect climate change, thus greenhouse gas emissions (GHG), deforestation, biodiversity, water, waste, and pollution that an organisation produces through its industrial operations would all be examples of ESG reporting. This helps businesses to adopt a more socially and environmentally responsible mindset, and since these are quantifiable numbers that can be analysed and accounted for within business processes, it gives companies a tool to track their development through time.
Reporting Is Extra
A strong ESG report demonstrates the company's dedication to sustainability. Additionally, it is crucial for business owners and organisations to reveal their ESG reports since they are transparent, hold board members responsible for their decisions, and enhance the company's reputation in the eyes of customers, employees, and potential investors. The majority of young people are now looking for professions that allow for remote or hybrid working and that don't negatively impact their physical or mental wellbeing, so the social aspect within the ESG domain is of utmost importance.
However, there are certain challenges with reporting, including the fact that it may be expensive and time-consuming to complete the process, mostly because this is usually an additional initiative to undertake aside from regular tasks. Extra work is never easy to integrate, and in order to demonstrate that their company genuinely cares about ESG issues, some may choose to ‘creatively represent the numbers’ through "unethical" methods in order to raise their ESG score. Conversely, there are many emerging companies offering reporting tools and technologies to assist in the process.
Third Party Assessment
Equally, companies aspire to be featured in the top ESG rating agencies, since it recognises and establishes a solid ESG reputation in their field. Some well-known ESG analysts, ESG experts, and investment professionals have awarded ESG rating agencies positive reviews. They provide a range of services, including stock screening, research on particular businesses or sectors, due diligence audits, and more. In premise, ESG risks and opportunities related to an investment or transaction are fairly and accurately evaluated by agencies.
Once companies demonstrate a strong ESG performance, being listed in a top ESG agency means they can be more easily compared directly to sector counterparts. Of the premier agencies today, MSCI is one of the biggest and is well known for issuing rankings and scores for ESG businesses.
Sustainalytics, another provider of ESG data and ratings, offers ESG evaluations for 20,000 companies across 172 nations. They evaluate 40,000 businesses globally. One of the biggest global producers of stock market data, Morningstar, owns Sustainalytics.
Standard & Poor's Global ESG Scores, one of the biggest providers of data analytics and reporting pertaining to businesses worldwide, is another well-known organisation.
Investors can choose if they should make long-term commitments to a firm by understanding its ESG measures with the aid of an ESG grading agency. Typically, a corporation will hire an ESG rating agency to conduct a thorough review of its operations and then assist it in creating stronger policies.
Favourable PR may be attained with positive ESG advancements and progress, and public sentiment is often swayed by close scrutiny to companies that flout their sustainability obligations or provide inaccurate data. However, it is crucial to remember that reputable ESG rating companies have the right to withdraw their ESG rating from a company if it is not adhering to good standard ESG practices in its business operations and is trying to pass itself off as environmentally friendly in order to gain positive public attention.
ESG Ratings - Takeaway
ESG ratings can be a challenging process because there is currently no accepted method for measuring and reporting ESG performance, for example, in the USA. However, new regulations such as the EU Sustainable Financial Disclosure Regulation (SFDR) under the Corporate Sustainability Reporting Directive (CSRD) have been introduced to increase transparency around sustainability rating claims made by financial organisations and to prevent greenwashing. As a result, all EU financial markets will have to make mandatory ESG disclosures to improve transparency.
And this is where the ESG ratings ball will start rolling. In terms of allaying any public sentiment of distrust in the ratings process, a firm precedent for regulatory backing in the form of the EU SFDR should open the stage for other regional versions to follow suit. This will compound both the necessity for and the quality of robust reporting processes, as ratified by ESG ratings agencies.
KnowESG uses current ratings data from Sustainalytics, Refinitiv, and MSCI so you can quickly check business ESG progress. Check out our Company ESG Profiles listing.