ERM Report Ranks ESG Agencies, Calls for Action
ERM, the leading sustainability consulting firm globally, has released its most recent evaluation of the ESG ratings industry.
The SustainAbility Institute, a subsidiary of ERM, created "Rate the Raters," which concludes that although demand is increasing, ratings agencies are facing growing doubts from companies and investors regarding data precision and the general quality and relevance of ESG ratings.
Over 50% of companies surveyed reported their involvement with at least six ESG ratings agencies. Respondents from the corporate survey ranked CDP as the leading ESG rater in terms of quality and usefulness.
In addition to CDP and ISS-ESG, Sustainalytics, MSCI, EcoVadis, and Bloomberg were among the ESG ratings frequently cited by both corporates and investors for their quality and usefulness.
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ESG ratings are primarily used due to investor demand, according to 57% of companies, followed by performance assessment (21%). This highlights the increasing adoption of ESG ratings and data into investment approaches.
In addition, 43% of investor respondents cited requirements from their companies to integrate ESG ratings and data into investment practices as a key reason for using ESG ratings providers, a significant increase from 12% in 2018/19.
Although demand for ESG ratings is increasing, the report shows that 29% of corporates have low to very low confidence in the accuracy of ESG ratings to reflect ESG performance, while 52% have only moderate confidence. In general, corporate trust in the quality and usefulness of ESG ratings has declined since 2018/19.
The survey found that investors had higher levels of trust in ESG ratings providers, with 59% reporting moderate trust and 38% reporting high to very high trust. However, there is a growing trend for investors to develop their own ESG indicators, metrics, and ratings in-house, indicating their efforts to build their own ESG expertise.
Maintaining trust requires ESG raters to improve quality and methodology disclosure, as well as consistency and comparability across ratings methodologies, according to half of surveyed investors and companies. ERM's report is released amid growing scrutiny of ESG performance and increasing ESG disclosure requirements for companies due to the rapid growth of ESG funds.
Against the backdrop of a dynamic sustainable investing environment, ERM's report highlights the rapid growth of ESG funds, intense scrutiny of companies' ESG performance, and increasing ESG disclosure requirements from regulators in the EU, the US, and other regions.
According to Tom Reichert, CEO of ERM Group, ESG ratings play a crucial role in promoting sustainability and recognising high-performing organisations. However, the survey shows that the ESG ratings industry is facing challenges that will shape its future.
He emphasises the need for transparent, robust, and trusted ESG ratings to create a sustainable investment environment that meets the needs of companies, investors, and raters. He hopes the report will spark discussions on how to work together towards this goal.
Click here to read the report.