The ABCs of ESG Reporting: The Role of Ratings Agencies in Corporate Strategy and Driving Sustainable Business Practices
Like them or not, ESG ratings agencies play a role in how a company’s environmental, social, and governance actions are perceived by investors, employees, consumers and the general public. These agencies often act like critics reviewing a movie: their feedback can boost or hurt a company’s image.
And just like movie critics, not all ratings agencies are considered equal. Some give detailed, well-researched feedback designed to help investors make informed decisions. Others are looking to shake down companies for money. And many obfuscate their methodology, making it extremely difficult to understand how they arrived at their ratings and whether their analyses can be taken seriously.
But regardless of the approach of these agencies, businesses can’t afford to simply ignore them. Why? Because what they say can have an effect on how everyone from investors to activists view a company’s dedication to doing right by people, the planet, and a company’s overall business strategy.
What Are ESG Ratings?
ESG ratings are independent evaluations of a company’s performance across environmental, social, and governance metrics based on publicly available data. These ratings are performed by private ratings agencies and are not regulated by any government body. However, these ratings can sometimes be misleading because they lack objectivity and transparency and can be based on unreliable or unverified data. Ratings can vary significantly across ratings agencies due to diverse methodologies, metrics, data, and weightings. Companies often find the variations in the ratings systems challenging, and very often frustrating.
The Three Pillars of ESG
Environmental: How a business interacts with nature, including energy use and emissions, water and waste, and issues of biodiversity.
Social: How businesses impact people - be it their employees, customers, or the communities they operate in. Examples include labor practices, human rights, and community engagement.
Governance: How businesses make decisions and who makes up the decision-making bodies, including transparency, accountability, and balancing the interests of key stakeholders. Metrics in this category include board composition, executive compensation, audit practices, and shareholder rights.
Why ESG Ratings Matter
ESG ratings matter at the most basic level because they matter to investors of public companies and they matter to brand reputation for both public and private companies. When making decisions about doing business with a company, investors and customers typically look at a diverse set of factors, including sustainability and whether the company is a good corporate citizen. Corporate ESG ratings, and the breakdown of these ratings into the E, S, and G factors, can add one data set to understanding a both company’s sustainability strategy and how the company stands within its industry compared to its competitors.
The ESG Ratings Ecosystem
There is a broad range of ESG ratings agencies out there, some of which are more well-respected than others. Here are some of the major players in this space:
CDP: One of the most reliable global platforms focusing on environmental disclosure and sustainable practices, engaging over 23,000 companies and cities worldwide.
MSCI: Recognized as one of the largest ESG research providers, covering over 14,000 issuers.
Sustainalytics: Offers data on a vast number of companies, covering 40,000 companies worldwide.
Bloomberg: Their ESG Disclosure Scores evaluate the ESG disclosure levels of more than 11,800 companies across more than 100 countries.
ISS: Offers diverse ratings across sustainable investment issues, including climate change and human rights.
Others include the S&P, FTSE Russell, and Moody's, each of which bring their own unique methodologies and focus areas.
A Snapshot of the ESG Ratings Process
Ratings agencies adopt a multi-pronged approach to evaluate companies. However, as noted earlier, some of the data, while objective in principle, may not be verified or complete or could be unreliable. Additionally, many ratings agencies are not transparent in providing details of the approach they take when scoring companies. This has rightfully given rise to critiques about the ratings’ accuracy, their reliance on outdated or proprietary data, and the fundamental challenge of encapsulating ESG performance into a singular score.
The Role of ESG Ratings in Corporate Strategy
As the environmental, social and governance work of a company continues to be an important factor examined by investors and other decision-makers, ESG ratings will continue to play a role in guiding decision-making and long-term planning. But while it is important to integrate them as one factor in how decisions are made, companies must do just that - consider them as only one factor. ESG ratings should be used by companies alongside internal and external ESG information sources as it prioritizes environmental, social, and governance initiatives throughout the company.
Conclusion
The emergence of such a broad range of ESG ratings agencies and processes has undoubtedly impacted how businesses approach their environmental, social and governance responsibility work. The influence that ratings have on investment decisions, in particular, is enough for companies to take these ratings seriously and work to improve them where possible.
Uplift works with companies to cut through the noise of ratings to help understand what really matters, how to use ratings appropriately, and why developing an appropriate ESG strategy can help you improve your scores while addressing your most pressing ESG issues. If you are looking for guidance on your company’s ESG ratings, reach out to us today.
The Uplift Agency
Uplift builds strategies, programs, and communication campaigns that advance ESG in workplaces, supply chains and communities.
We know how to navigate the road ahead because we’ve already been down it – 90 percent of our team has led environmental or social programs in corporations or nonprofits. Because ESG is all we do, our services are more comprehensive and integrated than most firms.
