ESG rating & ESG rating advisory

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Definition

Environmental, social and governance (ESG) information on listed companies is increasingly requested by investors and regulators.
ESG rating is an evaluation that certifies the soundness of an issuer, a security or a fund from the point of view of environmental, social and governance performance. It is complementary to traditional rating (credit risk assessment) and its aim is to increase the information available and therefore to improve the resulting evaluation and investment choices.

Today, "financial" data will no longer be the only data analyzed; on the contrary, ESG factors will become more and more important, as they will play a fundamental role in determining the risk and return of an investment.
A good ESG rating can help companies attract investment and reduce the cost of financing.

Extra-financial rating companies

There are several ESG rating systems set up by different rating agencies. Some of these rating systems are based on ESG performance, while others are based on ESG risk. 
Examples include: MSCI, FTSE Russell RobecoSAM, Bloomberg ESG Disclosures Scores, S&P Global ESG Scores

ESG Rating Methodology

In order to evaluate the ESG rating, the agencies use a multitude of information:
-    company publications;
-    government databases;
-    media;
-    NGOs or other stakeholders.
A questionnaire can also be used to collect additional information from companies.

Rating advisory

The objective of the rating advisory is to help the company to highlight its strengths and to assist it on its weak points. For this the department will need to know the methodologies of the different agencies.

For example:

  • MSCI measures 37 criteria, including carbon emissions, e-waste, data privacy and security, chemical safety and tax transparency. 
  • Vigeo Eiris analyzes up to 38 different criteria framed by 40 sector-specific templates. The 38 criteria take into account the fact that different companies face different challenges, assigning each criterion a varying weighting for each sector.