ESG rating systems are used to assess companies on their environmental, social, and governance performance. They assess companies on various sustainability parameters and indicators, possibly influencing their reputation and investor perceptions.
Companies should be motivated to participate in these ratings for several reasons. A strong ESG rating can enhance a company's reputation and brand value, attracting not only environmentally and socially conscious consumers but also like-minded employees and partners. In addition, investors increasingly factor ESG ratings into their investment decisions, where companies with strong ESG ratings may also be able to secure lower interest rates and other forms of financing. The Rate the Raters 2023 survey concluded that 43% of investor respondents (12% in 2018/19) said they were required to integrate ESG ratings and data into investment strategies, and 94% of investor respondents (78% in 2018/19) use ESG ratings products at least once a month.
By actively participating in ESG ratings, companies can improve their risk management by identifying and mitigating ESG risks to achieve long-term sustainability. Actively responding to ESG ratings can help companies prepare for the CSRD, which will come into effect for the first wave of companies as of 2025. The CSRD aims to enhance the quality and scope of non-financial reporting by companies, emphasizing the concept of double materiality. This concept extends the notion of materiality, traditionally applied to financial information, to encompass the significance of sustainability matters to both a company's financial performance and its impact on the environment, society, and governance.
A deeper dive into the ESG benchmarks and how they align with the CSRD can be found below.
The S&P Global CSA operates as an annual evaluation tool for a company's sustainability practices. With a coverage of over 13,000 companies globally, the CSA focuses on ESG criteria that are both industry-specific and financially material. It enables companies to report key sustainability metrics and benchmark their performance relative to their peers.
Alignment with CSRD: The CSA aligns with the CSRD by incorporating two dimensions of materiality: impact materiality and financial materiality, and how materiality mapping is used to assess the interactions between both. Actively participating in the CSA also supports aligning with the CSRD requirements, which you can read about in more depth through our article on leveraging the S&P Global CSA as a valuable roadmap for CSRD.
CDP utilises a scoring system based on the comprehensiveness and transparency of a company's environmental disclosure, specifically climate change, water security, and deforestation. Companies are awarded points for disclosing information on their environmental impact, their management of ESG risks, and their climate change mitigation and adaptation strategies. It is used to incentivize companies and cities towards environmental transparency and action, and drives disclosure and engagement on environmental issues.
Alignment with CSRD: The CDP questionnaires are aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) framework. The CSRD is broadly aligned with the TCFD, and therefore companies that respond to CDP's questionnaires are well-positioned to meet the CSRD's disclosure requirements. Guidance is also provided to companies on how to align their disclosures with the TCFD framework.
MSCI ESG Ratings are based on a rules-based methodology that is designed to measure a company's ability to manage financially relevant ESG risks and opportunities. MSCI uses a rule-based methodology to identify industry leaders and laggards according to their exposure to ESG risks and how they manage those risks relative to peers. MSCI uses a variety of data sources, including company reports, public databases, and third-party research.
Alignment with CSRD: MSCI has the ESG Industry Materiality Map on its platform, which represents the key ESG issues and their impact on companies' ESG performance, risk exposure, and mitigation. MSCI covers some elements of the CSRD requirements through topics including emissions, clean energy sources, energy consumption management, water stress and operational efficiency enhancements. Additionally, it includes the CDP disclosure, as well as social and governance themes such as health & safety and corporate governance.
Sustainalytics offers ESG Risk Ratings that can be used by investors and companies to understand and manage their ESG risks at the company and portfolio levels. Its research universe is expansive, covering a wide array of industries, with over 16,000 companies in the Sustainalytics ESG Research and Ratings universe, and offering risk ratings ranging from negligible to severe risk. Sustainalytics ESG Risk Ratings are based on a research-driven methodology, and use a variety of data sources, including company reports, public databases, and third-party research.
Alignment with CSRD: Sustainalytics includes the idea of materiality in their ESG evaluations by using a special set of Material ESG Issues (MEIs) to gauge the extent of an organisation's unmanaged ESG risk. With environmental elements such as emissions, effluents and waste, physical climate risk management, and social elements such as human capital and occupational health and safety, E&S impacts of products and services, as well as governance elements, Sustainalytics builds on some elements of the CSRD.
With over 125,000 companies in the EcoVadis universe, the benchmark’s approach is based on a combination of self-assessment and third-party verification. It combines technology and sustainability expertise to grade companies on criteria including environmental factors, labour and human rights, ethics, and sustainable procurement. Its scorecard and benchmarks offer insights that guide companies in improving their sustainability performance.
Alignment with CSRD: The EcoVadis sustainability rating platform provides a tailored approach to assess sustainability criteria specifically within supply chains. Through the platform, companies can acquire supplier risk transparency by leveraging validated data and certified documents that encompass industry, country, and company-specific factors. The environmental theme in EcoVadis incorporates CDP disclosures as well as themes like climate change, energy management and emissions. Sustainable procurement, human rights, employment conditions are strongly represented within the EcoVadis assessment, which in return supports some CSRD topics.
In the attached document, a simplified comparative analysis is provided of five of the top ESG rating providers on key dimensions. The table draws a comparison of the rating approach, scope of assessment, rating scale, coverage and other elements for each of the specified ESG rating providers.
While the five of the leading ESG rating systems discussed in this article offer different strengths and weaknesses, some themes do overlap across the benchmarks across the environmental, social and governance topics. With the ESG Streamliner Finch & Beak can help you in understanding the similarities, as well as the differences, of the ESG ratings and rankings your company participates in, and therefore optimising your ratings participation approach.
To further discuss how to make the most of the array of benchmarks to mobilize your sustainability action, please contact Johana Schlotter at Johana@finchandbeak.com or call +31 6 28 02 18 80.