ESG rating schemes: Which to target, and how to do well.
Updated: Apr 5, 2022
The following is an article I was recently asked to write for the Chartered Governance Institute. You can read the original version here.
A lot of time and effort can go into responding to ESG rating schemes. How do you know which one(s) to focus your efforts on, and what can you do to increase your company’s score?
MSCI, Sustainalytics, Bloomberg, VE, DJSI… the list of ESG rating schemes can seem endless at times. Each claim to be integral in the decision making of asset managers overseeing investments worth millions/billions of pounds. With more and more investors factoring ESG into their investment decisions, how do you decide which rating schemes to participate in?
Firstly, it depends on what your company is eligible to participate in, which is largely out of your hands. FTSE4Good and S&P Corporate Sustainability Assessment (for entry into the DJSI), for example, require companies to be listed in relevant FTSE and S&P indices, respectively; VE is by investor request; MSCI, Bloomberg and Sustainalytics are less transparent on eligibility, but each conducts extremely high volumes of assessments (in excess of 8.5k, 11.5k and 12k companies respectively).
Of course, even if your company is not eligible for an assessment, Sustainalytics and S&P Corporate Sustainability Assessment (amongst others) will, for a rather hefty price, happily oblige in an analysis.
Some rating schemes, arguably MSCI and Sustainalytics, are generally highly regarded. However, with each rating scheme having different criteria and covering differing topics (some industry-tailored, some not), it is inevitable that a company can score highly on one and poorly on another - something critics have not failed to notice. With investors often considering multiple ESG rating scheme scores in their evaluations, the key is not so much which scheme you do/do not participate it, but rather ensuring that you perform consistently well on the ones you do engage with.
Another factor in your decision making should be the time and effort involved in responding to the schemes. Some have several hundred questions/sub-questions (e.g. VE), whilst some have under a hundred (e.g. FTSE4Good; Bloomberg). Whilst most analyse your publicly available information and leave you to review/amend as appropriate, a few require you to upload your data to their system (e.g. VE), something which can be very time-consuming.
A final consideration should be whether your company can promote their rating externally or not. For most, you can share your score but not your comparative rankings (e.g. VE, FTSE4Good); however, a few have badges for top-performing companies which can be shared publicly (e.g. ISS ‘Prime’ status and Sustainalytics ‘ESG Industry Top Rated’).
Of course, there’s no point promoting your rating if it isn’t good, so what can you do to increase your company’s score? Well, whilst each scheme has different criteria, there are a few foundation requirements that can be found to a greater or lesser extent in nearly all schemes. Address the following, and your company will be well on its way to a decent score in whichever ESG Rating Scheme they participate in:
Define the board member and/or board-level committee responsible for ESG.
Align your company’s approach to the ten principles of the UN Global Compact, including a) conducting a human rights impact assessment of your business and developing a Human Rights Policy; b) putting in place an Environment Policy which explicitly covers energy, carbon and any other material environmental risks; and c) formalising, ideally with a policy, the company’s approach to bribery and corruption, equality/diversity and whistleblowing.
Publishing all ESG-related company policies on your website.
Of course, there is more to it than that, but with these in place you’ll hit the ground running.
If you need any assistance with responding to an ESG rating scheme request or implementing the changes needed to improve your score, Rawstone Consulting can help. Contact us here.