My CEO wants our company to get an A+ or 100 score with every ESG Rating Agency. Is it possible? What do I tell them?
As the saying goes, "beauty is in the eye of the beholder." Today, a company's "beauty" - or ESG rating or score - is in the eye of the specific ESG rating agency doing the scoring.
Over the last decade, I have observed the environmental, social, governance (ESG) rating systems in the market change, merge, and expand markedly.
From Sustainalytics, MSCI to Refinitiv, there are many companies providing an ESG score or rating. They use information voluntarily shared by companies or scraped from company websites and other publicly available sources. Despite multiple years in the market, the agencies remain independent of each other with limited overlap and consistency in their rating rubrics. Why is this? Each one is a proprietary system representing a revenue source from investors and asset managers.
Therefore, it's not possible to get an A+ or 100 score with every one. No company can fulfill every ESG rating agency's criteria or KPIs because either 1) the criteria or KPIs are not relevant to their business and/or 2) it would be enormously cost prohibitive to attempt to do so.
However, ESG ratings do matter. When used selectively but consistently, they do show how a company is performing over time for use by internal company stakeholders as well as external. Following an annual data collection strategy can also improve the rigor of internal reporting process while revealing gaps in data and processes.
Therefore, it's not time to throw the ESG rating baby out with the bath water. Instead, it's time to prioritize where you will spend resources aligning your business and sustainability strategy and investing in accurate and regular KPI tracking and reporting.
So, what do you tell your CEO?
With thoughtful analysis to back it up, a strong response is: "We are prioritizing increasing our ESG rating with the select agencies whose criteria and KPIs most closely align with our business strategy and ESG material issues and with the preferences of our key stakeholders including investors. Based on my analysis, the two ESG Rating Agencies are..."
How do you develop this actionable insight?
1. Understand the ESG Rating Agency landscape: Review existing reports that summarize the strengths, areas of difference, and scoring methodologies of the ESG Rating Agencies. Solid place to start include ERM's 2023 Rater's Report and ESG Ratings: A Compass without Direction, August 24, Harvard Law School Forum on Corporate Governance, August 24, 2022).
2. Bring in stakeholder feedback: Survey investors and key external stakeholders for the top three rating agencies that matter to them. They will mostly likely give you different answers which is to be expected. Narrow down to the three to five that rise consistently to the top.
3. Analyze best alignment for your company: Select the top three material issues for your company. Next, choose one criteria or KPI each of the top three to five rating agencies that most closely aligns to the three material issues. Finally, analyze and compare how these criteria best align with your company's business strategy, your material issues, the costs to increase your score for that criteria to the top level, the timeline to implement, and last but not least, the benefit to your stakeholders.
4. Present recommendation and move forward: Share with your CEO the recommended two to three rating agencies (max!) that you recommend your organization prioritizes providing information to and posting information publicly on your website. Summarize your model and landscape analysis as back-up to your recommendation. Move forward with a robust process to track and report out to these selected rating agencies.
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