ESG ratings and methodologies evaluate the sustainability and societal impacts of organizations. They give investors and companies insight into how well a company is doing in environmental responsibility, labour practices, and corporate governance. For the uninitiated, ESG stands for Environmental, Social, and Governance.
There are several different ESG rating agencies and methodologies, each with its unique approach to evaluating a company’s performance. For example, some agencies focus on a company’s carbon footprint and energy efficiency, while others emphasize labour practices and human rights. Additionally, some agencies use a quantitative approach, analyzing data such as financial performance, while others use a qualitative approach, conducting interviews and site visits.
Investors and companies need to understand ESG ratings and methodologies because they provide valuable insights into a company’s performance in areas not always captured by traditional financial metrics. For example, a company may have strong financial performance but fall short in environmental stewardship or labour practices. ESG ratings can help investors identify financially successful companies that positively impact society and the environment.
Furthermore, ESG ratings can also help companies identify areas where they can improve their performance and align with societal expectations to enhance their reputation, risk management, and long-term financial performance. As more and more investors pay attention to ESG factors, companies that perform well in these areas will attract investment and be successful in the long term.
In summary, ESG ratings and methodologies provide investors and companies with a more holistic understanding of corporate performance by evaluating it on multiple environmental, social, and governance aspects. It helps them make better investment decisions and identify areas of improvement. As ESG investing gains popularity, understanding these methodologies is becoming increasingly important.
Various ESG Rating Agencies and the Methodologies they Use
Bloomberg ESG Ratings
Bloomberg ESG Ratings, launched in 2009 after the acquisition of New Energy Finance, is a service that provides information on the environmental, social, and governance (ESG) performance of over 10,000 publicly listed companies globally. The service evaluates companies annually by collecting public ESG information disclosed by companies through corporate social responsibility (CSR) or sustainability reports, annual reports, websites, and other public sources, as well as through direct contact with the companies. The data is checked and standardized, including 120 indicators for environmental, social, and governance, such as carbon emissions, climate change impact, pollution, waste disposal, renewable energy, resource depletion, supply chain, political contributions, discrimination, diversity, community relations, human rights, cumulative voting, executive compensation, shareholder rights, takeover defense, staggered boards, and independent directors. Companies that do not disclose data will be penalized by the rating service. The rating scale ranges from 0 to 100, with scores from third-party rating agencies such as RobecoSam, Sustainalytics, ISS Quality Score, and CDP Climate Disclosure Score, as well as an overview of historical ESG performance relative to peers. Bloomberg ESG Ratings focuses on mid-to large-cap companies with a market cap of more than $2 billion.
CDP Scores (Formerly Carbon Disclosure Project)
CDP, formerly known as the Carbon Disclosure Project, is a scoring system that works to motivate companies to disclose and take action to reduce their environmental impacts. CDP uses its scoring methodology to incentivize companies to measure and manage environmental impacts through participation in CDP’s Climate Change, Water, Forests, and Supply Chain programs. The scoring methodology assesses the level of detail and comprehensiveness of a company’s response, as well as its awareness of environmental issues, management methods, and progress toward environmental stewardship. CDP’s scoring partners produce scores based on the data provided in company responses and the methodology is available online for transparency. The scoring system is divided into four levels: Disclosure, Awareness, Management, and Leadership, with companies being assessed and awarded points at each level. The points are then converted into a percentage, providing a snapshot of how a company compares with others in their sector. The scoring system is mission-driven, focusing on CDP’s principles and values for a sustainable economy, and aims to drive changes in company behavior to improve environmental performance.
FTSE Russell ESG Ratings
FTSE Russell‘s ESG Ratings and data model provide investors with a comprehensive understanding of a company’s exposure and management of ESG issues. The model includes 7,200 securities in 47 developed and emerging markets, including the FTSE All-World Index, FTSE All-Share Index, and Russell 1000® Index. The data is flexible and customizable and is built on over 300 individual indicator assessments that are applied to each company’s unique circumstances. The ESG Scores are calculated using an Exposure-weighted average, meaning that the most material ESG issues are given the most weight when determining a company’s scores. FTSE Russell’s ESG data model is overseen by an independent external committee and supports alignment with the UN Sustainable Development Goals (SDGs). The data is designed to assist in managing exposure to ESG aspects, meet mandated stewardship requirements, integrate ESG data into securities and portfolio analysis, and implement ESG-aware investment strategies. The data collection process for FTSE Russell’s ESG research relies on publicly disclosed information only and companies are allowed to provide feedback and additional information that could be factored into the analysis.
ISS (Institutional Shareholder Services) offers a range of ESG solutions to assist institutional investors in integrating responsible investment policies and practices into their investment decisions, engaging with companies, and executing their policies through voting. In 2015, ISS acquired Ethix SRI Advisors and formed a strategic partnership with RepRisk, allowing ISS to expand its ESG and socially responsible investing (SRI) research. ISS also provides climate change data and analytics from its acquisition of Climate Neutral Investments. ISS QualityScore offers in-depth research on corporate governance for over 5,600 publicly traded companies globally.
The ISS Quality Score rating scale is based on a 1st to 10th decile, with a score in the 1st decile indicating relatively higher quality governance practices and lower governance risk, while a score in the 10th decile indicates relatively higher governance risk. The methodology analyzes over 200 factors, divided into four pillars: board structure, compensation/remuneration, shareholder rights, and audit & risk oversight. A specific weight is placed on each factor depending on the governance standards in each region, the ISS voting policy, and the impact on governance practices.
ISS-Ethix provides research, screening, and analysis on various ESG topics such as controversial weapons screening, ethical screens, energy & extractives screening, global sanctions screening, and research on companies’ adherence to human rights, labor standards, environmental protection, and anti-corruption. In partnership with CDP, ISS-Ethix launched the world’s first climate impact rating for investment funds called Climetrics, which allows investors to make climate-friendly investments. The ratings are on a scale of one to five “green leaves.” ISS is a leading ESG data and analytics provider in the industry.
MSCI (Morgan Stanley Capital International) ESG Ratings
MSCI (Morgan Stanley Capital International) ESG Ratings provide a comprehensive evaluation of a company’s environmental, social, and governance performance. Launched in 2010, MSCI ESG Research is one of the largest independent providers of ESG ratings, providing ESG ratings for over 6,000 global companies and more than 400,000 equity and fixed-income securities. The ratings are based on a scale of AAA-CCC and are updated every week. MSCI ESG Research looks at 37 key ESG issues, divided into three pillars (environmental, social, and governance) and ten themes. The data is collected from various sources such as government databases, company disclosures, and macro data from academic, government, and NGO databases. Companies are systematically monitored and reviewed, and new information is reflected in updates in reports weekly. In-depth company reviews occur at least annually. Companies are also invited to participate in a formal data verification process before the publication of their ESG Ratings report. MSCI ESG Ratings are widely used by institutional investors such as BlackRock, State Street Global Advisors, Allianz Group, BMO Global Asset Management, and others. The ratings are available through subscription-based access to reports and on platforms like FactSet, POINT, StyleResearch, MSCI’s BarraOne, and Barra Portfolio Manager. MSCI is currently consulting on whether ESG factors should be reflected in the MSCI GIMI (Global Investable Market Indices), which would likely mean that MSCI’s ESG research would be integrated into the MSCI GIMI methodology.
Refinitiv ESG Scores
Refinitiv’s ESG scores provide a transparent and objective measurement of a company’s environmental, social, and governance performance, commitment, and effectiveness. Based on publicly available data, the scores are calculated using over 630 company-level ESG measures, which are grouped into 10 categories that form the three pillar scores. These categories include emissions, environmental product innovation, human rights, shareholders, and more. Refinitiv’s ESG score reflects the underlying ESG data framework, considering industry materiality and company size biases. The final ESG score reflects the company’s performance, commitment, and effectiveness based on publicly reported information. It allows investors to understand a company’s exposure to ESG issues, helping them make informed investment decisions. Companies are given access to review and provide feedback on the data used in the assessment, and Refinitiv’s team of analysts will determine if a change in assessment is warranted.
RepRisk ESG Rating (RRR)
RepRisk is a leading provider of ESG research and ratings for private and public companies. Founded in 1998, the company offers reports for more than 84,000 companies in 34 sectors globally, as well as over 14,000 NGOs and 10,000 governmental bodies. RepRisk’s rating scale ranges from AAA to D, with updates provided daily. The company’s methodology involves screening relevant data from over 80,000 media and stakeholder sources, with a focus on 28 ESG issues that are divided into environmental, community relations, employee relations, and corporate governance categories. Additionally, RepRisk also examines 45 specific ESG hot topics. Companies are invited to participate in a formal data verification process before the publication of their ESG ratings reports. RepRisk has formed partnerships with organizations such as the Carbon Disclosure Project and the United Nations-supported Principles of Responsible Investment. Asset managers and other entities that use RepRisk’s services include Advent International, Amundi, and Legal & General, among others. RepRisk’s company reports, and Director’s Briefs can be accessed through the company’s ESG Risk Platform or bought individually, with prices ranging from $467 to $3,630.
S&P Global ESG Scores
S&P Global ESG Scores are a measure of a company’s exposure to and performance on key environmental, social, and governance (ESG) risks and opportunities. The scores focus on quantitative, performance-driven metrics, as well as management programs and policies across 61 GICS®-aligned sub-industries. The scores are measured on a scale of 0 – 100, where 100 represents the maximum score. Points are awarded based on the availability, quality, relevance, and performance of data points on ESG topics. These scores are constructed through the annual S&P Global Corporate Sustainability Assessment (CSA), which invites all companies in the research universe to participate. Companies submit responses and supporting evidence through an online portal and the data is assessed based on the latest financial year reporting. The scores and underlying data levels are updated monthly to reflect changes that may result from ongoing research processes. The CSA evaluates corporate sustainability risks, opportunities, and stakeholder impacts over the short, medium, and long term, with general criteria and industry-specific factors being assessed. The questions within each criterion are structured to assess a company’s awareness of the relevance and impact, quantification of risk exposure and potential opportunities, and implementation of strategies to manage sustainability risks and capitalize on opportunities.
Sustainalytics ESG Risk Ratings
Sustainalytics is a leading provider of ESG research and data, which helps investors identify and manage the risks and opportunities of investing in companies based on their environmental, social, and governance practices. The company was formed in 2008 through the consolidation of DSR, Scores, and AIS, and currently covers over 6,500 companies across 42 sectors, with a presence in multiple countries.
The rating scale used by Sustainalytics is a score out of 100, which is based on a sector/industry comparison. The methodology used involves analyzing key ESG issues and indicators, which are split into three themes: environmental, social, and governance. The set of issues and indicators analyzed will vary by industry, with a specific weight placed on each issue.
Sustainalytics covers at least 70 indicators in each industry. The ESG indicators are split into three dimensions: preparedness, disclosure, and performance. The company’s ESG rating report is based on a quantitative and qualitative assessment of the company’s performance and considers the company’s management systems and policies, as well as their level of transparency and controversial incidents they may have been involved in.
Sustainalytics has formed strategic relationships with several institutional investors, including Columbia Threadneedle, Norwegian Government Pension Fund, BNY Mellon, and City of London Investment Management (CLIM). In 2011, STOXX launched STOXX Global ESG Leaders Index Family, which is based on Sustainalytics’ ESG research. The company’s ESG ratings are also available on third-party systems such as Bloomberg, Factset, and IHS Markit.
Thomson Reuters ESG Research Data
Thomson Reuters ESG Research Data provides a comprehensive analysis of environmental, social, and governance (ESG) factors for over 6,000 public companies. The company uses a percentile rank scoring methodology to calculate its ESG scores, which are based on over 400 different ESG metrics that are grouped into 10 categories: Resource use, emissions, innovation, management, shareholders, CSR strategy, workforce, human rights, community, and product responsibility. Each category is weighted based on the number of measures it contains, with categories that have multiple issues, such as management, having a higher weight than lighter categories such as human rights. The company also includes an analysis of 23 “Controversy Topics” in its ESG Score, which covers topics such as business ethics, intellectual property, public health, and human rights. The ESG Scores are available on the Thomson Reuters Eikon platform, but it is not specified how the data is used by investors or if companies can provide input or feedback on their scores.
Dow Jones Sustainability Index (DJSI)
The Dow Jones Sustainability Index (DJSI) is a float-adjusted market capitalization-weighted index that measures the performance of companies selected based on Environmental, Social, and Governance (ESG) criteria using a best-in-class approach. The DJSI is created in partnership with S&P Global Sustainable, a specialist in ESG research and data, to provide investors with objective benchmarks for managing their sustainability investment portfolios. The DJSI index family includes sub-indices that exclude companies engaged in certain activities widely considered unsustainable. The DJSI benchmarks are comprised of three geographical breakdowns: DJSI World, DJSI Regions, and DJSI Countries. The key factor in selecting constituents for any DJSI index is a company’s S&P Global ESG Score, calculated under the S&P Global Corporate Sustainability Assessment (CSA). Companies are assessed based on their industry classification on the last business day of March, and if a company changes its domicile or industry, it will be eligible under its new classification starting with the subsequent assessment cycle. In the case of multiple classes of stock, only the stock with the largest float-adjusted market capitalization is considered for selection.
Corporate Knights Global 100
The Corporate Knights Global 100 is an annual ranking of the world’s most sustainable corporations, published in 2005. The ranking is conducted by Corporate Knights, a specialized media and investment research firm based in Toronto. Corporate Knights is an employee-owned B Corp that operates in three segments: Corporate Knights Magazine, Corporate Knights Research, and Council for Clean Capitalism. The Global 100 ranking is based on a rigorous assessment of public companies with revenue over $1 billion and is based mostly on publicly disclosed data. The ranking is based on up to 24 key performance indicators (KPIs) covering resource management, employee management, financial management, clean revenue & clean investment, and supplier performance. Eligibility for the ranking is based on size and Corporate Knights Industry Group and geography. The ranking is meant to be representative of business sustainability in the current socio-economic context and is transparent, objective, and based on public data. Companies are compared against their Corporate Knights Industry Group peers and stakeholders’ feedback is actively solicited throughout the project.
Kinder, Lydenberg, and Domini (KLD)
Kinder, Lydenberg, Domini & Co. (KLD) is a leading provider of social research on U.S. companies for institutional investors. Founded in 1989 by Peter Kinder, Steve Lydenberg, and Amy Domini, KLD is committed to providing investment managers with comprehensive and accurate information on the social performance of companies. They offer a range of consulting services and products to help clients make informed decisions about social investing.
KLD maintains a large body of research on companies, applying both positive and negative social investing criteria. They present their findings in formats specifically designed for investment portfolio managers, including the Domini 400 Social Index (DSI) which serves as a benchmark for socially responsible investing. They also offer an Online Social Investment Database Service, providing 24-hour access to data and analysis on the social records of over 800 publicly traded corporations.
KLD reviews cover a company’s strengths and weaknesses in nine major social areas, including the environment, employee relations, community involvement, product safety, and executive compensation. They also offer a variety of publications including Company Reviews and their Social Investment Database. They also publish the DSI News, a monthly newsletter that updates the performance of the DSI relative to the Standard & Poor’s 500 Index.
KLD is the Investment Advisor and Portfolio Manager of the Domini Social Equity Mutual Fund and is committed to providing investors with the tools they need to make informed decisions about social investing.
Moody’s ESG (Vigeo-Eiris)
Moody’s ESG (Vigeo-Eiris) assessments measure the degree to which companies manage environmental, social, and governance (ESG) factors that affect their financial performance and how their business impacts the environments and societies in which they operate. The assessments are based on double materiality, meaning they include external environmental and social risks to financial performance, as well as how the company’s operations impact its surroundings.
Moody’s ESG Solutions has adopted a revised version of the methodology. The key revisions to the current methodology include the introduction of an appendix that provides more details on the credit implications for financial institutions of E, S, and G considerations and how Moody’s assigns IPSs and CISs. The assessment of a financial institution’s exposure to ESG risks and benefits is primarily qualitative, and the methodology describes relevant considerations generally applicable across financial institution sectors. Additionally, a compendia document appendix will be introduced that provides more details on the qualitative considerations and illustrative types of quantitative metrics informing IPSs and CISs for financial institutions. Moody’s may expand this compendium to provide further details of more sector-specific considerations and types of metrics as more data become available or indicators become relevant to their analysis. Moody’s expects no changes to outstanding ratings for financial institutions.
The EcoVadis methodology aims to measure the quality of a company’s sustainability management system through its policies, actions, and results. The assessment evaluates 21 sustainability criteria that are grouped into four themes: Environment, Labor & Human Rights, Ethics, and Sustainable Procurement. These criteria are based on international sustainability standards such as the UN Global Compact, the International Labour Organization (ILO) conventions, the Global Reporting Initiative (GRI) standards, the ISO 26000 standard, the CERES Roadmap, and the UN Guiding Principles on Business and Human Rights.
EcoVadis provides web-based collaboration tools for businesses, which allow procurement executives to access easy-to-use, dynamic scorecards, and to monitor the sustainability performance of their trading partners as well as their continuous improvement actions. The EcoVadis process includes seven management principles, 21 CSR criteria across four themes, a data collection and rating process, a diversity of data sources, and technology and CSR expert analysis.
To participate in the EcoVadis assessment, companies can register online and create a company profile, specifying their business activity, contact information, etc. They will then answer a customized questionnaire and upload supporting documents. The questionnaire is secure, confidential, and multilingual with a support team ready to help. Once completed, EcoVadis analysts will distill the answers into a Scorecard, an independent questionnaire, and a document-based management system assessment. Companies can access their Scorecard results online, share them, collaborate with customers, improve their performance, and broadcast their success.
How do Investors use ESG Ratings?
ESG ratings are used by investors to evaluate the sustainability and societal impact of companies and organizations. These ratings provide investors with an understanding of how well a company is performing in areas such as environmental stewardship, labor practices, and corporate governance.
Investors use ESG ratings in a variety of ways. Some investors use ESG ratings as a screening tool to identify companies that are performing well in these areas and avoid those that are not. This is known as “ESG integration” and it is a way to align investments with personal values and beliefs. Other investors use ESG ratings to identify companies that are at risk of financial or reputational harm due to poor performance in these areas. This is known as “ESG exclusion” and it is a way to minimize risk in an investment portfolio.
ESG ratings can also be used by investors to identify companies that are likely to outperform their peers over the long term. This is because companies that are performing well in areas such as environmental stewardship, labor practices, and corporate governance are more likely to be successful in the long term.
The difference between rating methodologies is that each agency has a different approach to evaluating a company’s performance. For example, some agencies focus on a company’s carbon footprint and energy efficiency, while others focus on labor practices and human rights. Additionally, some agencies use a quantitative approach, analyzing data such as financial performance, while others use a qualitative approach, conducting interviews and site visits.
Investors should consider the different rating methodologies available and choose the one that best aligns with their investment goals and beliefs. It is important to note that no single rating system is perfect, and investors should use multiple sources of information to make investment decisions.
April 7, 2023 at 7:28 am
Very useful information.
We are starting ESG initiative. Please help by sharing what is required and by when. And some success stories.