ESG rating agencies play an important role in assessing the sustainability performance of companies. As part of complex ESG ratings, the agencies evaluate how sustainable a company’s business practices are and prepare corresponding overall assessments. These are increasingly being used by investors as a key criterion for their own investment decisions or as a basis for structuring financial products. Other stakeholders are increasingly relying on the assessments of ESG rating agencies to decide on business relationships, for example in the context of supply chain relationships. A poor ESG rating can therefore have a negative impact on a company’s reputation and significantly impair its financial performance.
To prevent these risks, more and more companies are trying to improve their ESG ratings. The focus is usually on the most influential ESG rating agencies on the capital market. These include MSCI, ISS ESG, Sustainalytics, S&P Global, Refinitiv and Moody’s. These providers currently receive the most attention from investors and other stakeholders when it comes to obtaining assessments of companies’ sustainability performance.
As a consulting agency, cometis AG supports companies from various sectors in optimizing their ESG ratings. Over the past seven years, we have analysed numerous ESG ratings in detail and exchanged views with many analysts from ESG rating agencies on the specific criteria for the ratings. We have also examined and compiled countless evaluation criteria from ESG ratings as part of the Global ESG Monitor. Based on the experience we have gained, we present below a selection of tips that companies should definitely consider when they are seeking to optimise their ESG ratings in a targeted manner.
1. Selection and Prioritization of ESG Ratings
Estimates of the number of ESG rating agencies vary widely in some cases. In 2020, the President of the World Business Council for Sustainable Development estimated that there were over 600 ESG ratings worldwide (WBCSD, 2020). With regard to the EU, however, the European Securities and Markets Authority recently stated that only 59 ESG rating agencies are active there (ESMA, 2022). Regardless of these varying figures, it is clear that there have been numerous consolidations within the ESG rating industry in recent years. However, this has not led to a reduction in the importance of ESG rating providers. Instead, the influence of the most renowned and largest agencies in particular has continued to increase. Accordingly, companies should initially focus primarily on the ratings of these providers and make a selection and prioritisation in this respect. As the individual ESG ratings are usually very complex and also focus on different topics, it is simply not possible to optimise the ratings of all providers at the same time in a truly efficient manner. It is therefore important to determine which ESG ratings are most relevant for my company and my stakeholders. The focus should be on a maximum of three to four providers at the same time in order to ensure a targeted and efficient optimisation and make the best possible use of your own resources.
2. Understanding the Basic Focus
The second prerequisite for a targeted improvement of ESG ratings is the development of a fundamental understanding of how relevant the areas “E”, “S” and “G” are in the assessment. The first step should therefore be to identify which of these three dimensions of sustainability are awarded the most points in the ESG rating. Some agencies, for example, place a particular focus on the “E” area and therefore on environmental issues. Others give particularly strong weighting to the “S” or “G” areas and therefore focus primarily on social aspects or good corporate governance. However, the basic prioritisation in the ESG ratings can differ not only with regard to the agencies. The sector to which a company belongs also has a significant influence across agencies on which of the three areas are weighted more heavily and which less heavily by the providers. In the case of companies from the pharmaceutical industry or the gambling sector, for example, many rating providers clearly prioritise the “S” area. In order to optimise the ESG ratings of companies from these sectors as effectively as possible, the associated topic areas and the relevant individual criteria in the “S” area should be examined more closely. It is therefore necessary to always understand the basic focus of the agencies in order to be able to prepare the most effective steps for ESG rating improvement.
3. Identify Topics with a High Weighting
ESG ratings differ not only in terms of the emphasis placed on the “E”, “S” and “G” areas. There are also significant differences within these three areas as to which topics play a role. With regard to the “E” area, for example, MSCI only assesses the data, measures and targets relating to greenhouse gas emissions for companies in some sectors. Other classic environmental issues such as waste generation, resource consumption or biodiversity – which are certainly relevant for other ESG rating providers – are completely disregarded by MSCI. This means that if companies from the relevant sector now provide extensive data and information on environmental issues other than greenhouse gas emissions, it will have no influence whatsoever on the assessment of their sustainability performance, at least when it comes to MSCI. Their corresponding ESG rating would not improve. Of course, this is a relatively extreme example with a very clear focus on “E” by a single rating agency. In this clarity, the case is also rather an exception; it is usually more complicated. Within the “E”, “S” and “G” categories, the rating agencies generally assess performance with regard to a whole range of subordinate topics. In the “S” area, for example, emphasis is placed on the topics of “equal opportunities”, “health promotion”, “human rights”, “stakeholder dialogue”, “product safety” and “working conditions in the supply chain”. However, the individual topic areas are then usually assigned very different levels of importance for the overall assessment of the “S” area. It is therefore crucial to identify in each rating report which topics are weighted more heavily and which are weighted less heavily. Only when it is clear where the rating agency analysts award the most points the measures for rating optimisation can really be implemented in a targeted and efficient manner.
4. Conversion of Individual Criteria into An Organized to-do list
Once it has been analysed which areas and topics are particularly relevant in the rating, a thorough look should be taken at the individual criteria used by the rating agencies. In most cases, the assessment of an individual topic area is based on the points awarded for various individual criteria. For example, in order to receive a good rating from ISS ESG in the “Equal opportunities and non-discrimination” topic area, companies must publish a “Policy on non-discrimination” (individual criterion 1), provide data on “Gender balance” (individual criterion 2) and list “Measures to promote equal opportunities and diversity” (individual criterion 3). As soon as the individual indicators associated with each topic area have been identified, they should be converted into clear to-dos and transferred to a general to-do list. It is advisable to divide the to-dos into specific categories, such as “quick wins/short-term to-dos”, “medium-term to-dos” and “long-term to-dos”. When transferring and assigning to-dos, particular consideration should be given to their feasibility – also in light of the resources available. For example, it may be relatively easy for a company to include an existing internal key performance indicator in future reporting or to publish an existing internal guideline as a general policy on the company website. On the other hand, implementing a new management system in accordance with an ISO standard can involve a comparatively high level of effort. The exact weighting of the individual criteria and possible overlaps with the criteria of other ESG ratings should also be taken into account. Some agencies also provide further information on their individual criteria, which should also be taken into consideration. The final result should be a list of clear and organised to-dos that can be used to derive concrete next steps for improving the ESG rating.
5. Review Agency Analyses and Seek Dialogue
An important step in rating optimisation is the careful review of the analyses by the agencies. Time and again, agency analysts overlook relevant data and information, even though they have been precisely prepared and published in the sustainability report or on the company website. Unfortunately, the exact process of analysis is generally not very transparent. It is therefore difficult to assess the extent to which the analysis is automated, for example, or whether it is simply based on a manual search for specific keywords. It is also not clear how much time is actually spent analysing a company. What is clear, however, is that errors occur regularly, which sometimes has a significant impact on the overall assessment. If this is the case, direct dialogue should be sought with the agency or the responsible analysts. This is possible with the larger rating agencies via their own online portals. There, companies have the opportunity to give analysts feedback on their ratings. The operation of the various portals can be quite complicated. However, at least the more influential providers have already developed a structured process whereby feedback can be provided in great detail – at the level of individual criteria. A company should always include a reference to where exactly a value or information can be found that is relevant for a specific individual criterion. Overall, a careful review of the analysis and the creation of feedback is relatively time-consuming, but the effort is usually worthwhile and often leads to a (significant) improvement in the ESG rating. For this reason, a careful review should always be carried out for every new ESG rating that a company receives, as well as for every update of an existing ESG rating, and dialogue should be sought with the agencies if errors are discovered.
Through targeted ESG rating optimisation, companies can ensure that their ESG performance is assessed appropriately and take effective measures to improve their ESG ratings. In addition, the insights gained in this context can also be used for sharpening the company’s own ESG strategy, for the general further development of its own ESG reporting or for conducting ESG due diligence with regard to M&A deals, among other things. In recent years, we have often found that careful rating analyses and precise communication in the sustainability report in particular can lead to clear ESG rating improvements. cometis AG has developed its own tool, the ESG Rating Impact Tool, for the systematic process of improving ESG ratings. This tool and our experience from many ESG rating projects form the basis for our cooperation with our clients. Further information can be found on our website under ESG Rating Advisory or Rating Impact.
Do you need further advice on dealing with ESG rating agencies? Then cometis is the right contact for you: We will be happy to answer your questions by telephone (+49 611 20 58 55 18) or by e-mail (diegelmann@cometis.de)!