What Makes a Good ESG Rating?
Along with an enormous interest in socially responsible investing (SRI), there are a handful of ESG rating agencies that use rigorous criteria to evaluate companies based on ESG performance metrics. ESG ratings are evaluations of a company based on a comparative assessment of the quality, standard or performance on ESG issues.
ESG rating is important not only because investors have started putting a lot of faith in it, but also because it significantly affects numerous companies’ strategic decisions.
SustainAbility, an advisory firm that aims to inspire and enable businesses to lead the transition to a sustainable economy, has published “Rate the Raters” research to help inform companies and investors’ decisions made with reference to ESG ratings. The research is based on a thorough assessment of 319 highly experienced corporate sustainability practitioners worldwide.
The research findings suggest that RobecoSAM, MSCI, CDP and Sustainalytics are mentioned most often as the highest quality ratings. Other ESG ratings include ISS, FTSE Russell, Bloomberg ESG score, and others.
TOP 3 Factors that determine the quality of ESG ratings:
- Credibility of data sources
- Quality of methodology
- Focus on relevant/material issues
Prioritization of TOP 3 Factors that determine the quality of an ESG rating by different sectors
These three factors are considered to be the most important factors for determining the quality of an ESG rating by both the corporate sector and academic/Think Tanks and NGOs. While corporate sector considers focus on material issues to be the most crucial factor, academic/Think Tanks and NGOs regard transparency and credibility of data sources as the most important factor for determining the quality of ESG ratings.
ESG ratings receive higher scores for quality than usefulness
All of the perceived average quality scores (i.e. excellence, accuracy, etc.) of analyzed ESG ratings are higher than scores on usefulness. Ratings are often seen as less useful even if they are of good quality.
Sustainability experts’ recommendations for improvements on ESG ratings
- Make it easier for investors- Improve readability and accessibility
- Tie ratings to sustainability thresholds and systemic changes
- Industry-specific materiality and normalization within individual industry segments
- More qualitative analysis and preparations by analysts
- Greater transparency of methodology and assured independence