ESG ratings are scores and/or rankings issued by rating agencies as a measure of a company’s ESG performance and exposure to long-term ESG-related risks. There are presently over 600 ESG rating platforms globally. Investors use these ratings to assess investment opportunities, investment risk and the performance of existing investments. In addition, many of these platforms publicly disclose their assessments, making them available to other stakeholder groups that can use the ratings to get a snapshot of a company’s current ESG status.
Types of Ratings
Active raters are those that seek out input and participation from the company being evaluated. An active rating can be voluntary, such as the ones done by CDP, or they can be part of a larger assessment such as those done by S&P Global. The consistent aspect of an active rating is that the company involved can provide input to the rater.
Passive raters are those that use publicly available data to make assessments of company performance. In many cases, companies may not even know they are being evaluated. Passive raters look for publicly disclosed policies, reports, goals and statements to help inform their assessment.
There is currently no universally accepted ESG rating platform or scoring methodology, and even the most well-known agencies can produce different scores for the same company. Combining information from multiple raters often provides the most accurate and holistic view of a company’s ESG performance. Some raters use only information that companies make publicly available, while others request information directly from companies to inform their ratings.
The most notable ESG rating agencies and platforms include:
How to Check / Improve ESG Scores
Many ESG raters make their scores publicly available, but they often disclose little information about their exact criteria and scoring methodologies. Some agencies, such as ISS, require direct engagement with a company to determine its scores, and they will then provide the company with a report of its score(s). Depending on the rater, there are several different ways retailers can improve their ESG scores:
- Collecting data and publishing ESG/sustainability reports
- Creating a board-level ESG oversight committee
- Setting targets for greenhouse gas emissions reductions
- Offering employee trainings (e.g., DEI) and professional development programs
- Conducting annual employee satisfaction surveys
- Adopting policies for business ethics, environmental stewardship, anti-corruption, data privacy, etc.
- The Motley Fool: What is an ESG Rating?
- Fast Company: Are ESG ratings actually measuring how responsible a company is?
- Bloomberg: MSCI, the largest ESG rating company, doesn’t even try to measure the impact of a corporation on the world. It’s all about whether the world might mess with the bottom line.
- MIT Management Sloan School: Why sustainable business needs better ESG ratings
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Last Updated: 4/15/2022