Navigating ESG Raters and Rankers
Date: September 6, 2022
Driven by investor pressure, the number of companies measuring and reporting on environmental, social and governance (ESG) data has grown exponentially over the past two decades. As investors started incorporating this information into their investment decisions and seeing positive correlations among ESG management, risk mitigation, and financial returns, they began urging companies to publish more detailed information on how they manage their ESG risks.
Given the rapid rise in ESG disclosures and a multitude of reporting frameworks, the current reporting landscape lacks standardization and impedes comparability of companies’ performance on ESG issues. To bridge this gap of comparability, over 100 ESG data providers have emerged in recent years to give investors a baseline level of comparable data when analyzing a company’s ESG performance. Yet, each data provider uses its own scoring methodology and the differences in methods often leads to variations in the scores companies receive across agencies. For instance, a company may receive an A rating from MSCI, while receiving a medium risk rating from Sustainalytics for the same reporting period.
Earlier this year, CECP-affiliated companies shared—via a survey—some of their key questions regarding ESG raters and rankers. Most companies do not have clarity on how rating providers reach a certain score and cite a lack of transparency in methodologies, including how material issues are defined, weighting of metrics, and how data is collected and screened. Additionally, companies are seeking more information on the timing of updates to methodologies and how they can better interact with ESG data providers.
CECP’s Sustainable Business Center of Excellence is working to provide our affiliates with the tools needed to better understand the rating and ranking landscape. To this end, CECP (virtually) sat down this summer with three key ESG ratings and rankings agencies from S&P Global, Moody’s ESG Solutions, and MSCI to better understand their rating methodologies and how companies can better engage with the data providers.
Below are a few key highlights from the interviews:
- Updates to methodologies occur on an annual basis and follow a rigorous assessment. S&P Global’s methodologies change about 15% year over year due to evolution in the ESG space and availability and awareness of ESG topics.
- Universally recognized sustainability standards, guidelines and recommendations underpin the methodologies. Moody’s ESG Solutions’ granular approach takes into account over 300 different ESG metrics and maps the metrics to specific reporting standards and regulatory frameworks.
- Double materiality has become more common among issuers and ratings providers. The agencies consider how a company impacts the environment and society and how ESG factors affect companies from a financial perspective.
- The data providers encourage companies to reach out and engage with them. Companies can engage with MSCI through their ESG Issuer communications portal, a free online portal for data transparency and are open to feedback through a data review process. Additionally, MSCI is launching an Issuer Academy with foundational content related to understanding MSCI’s tools, reports, methodologies, and communications portal.
Full clips of the interviews are available only to CECP companies at the Comprehensive Service Level on MyCECP. For additional insights on ESG data providers and to learn more about CECP’s ESG Company Snapshot rating benchmarking assessment, reach out to firstname.lastname@example.org.