ESG Rating – Measurement on ESG Needs An Overhaul
We’ve previously discussed the Environmental, Social and Governance (ESG) framework, and why there needs to be more of a focus on emissions when rating companies.
The ESG Rating
There are more than 160 ESG rating companies worldwide, some of which rate hundreds of businesses a year – such as Sustainalytics who rate over 13,000 companies globally.
By having an ESG rating, companies may improve their relations with shareholders, increase investments, and gain access to lower-cost capital.
However, a lack of reliability, comparability and transparency in what is being measured means that they are unable to provide accurate signals.
ESG rating agencies play an important role in socially responsible investment, with data providing a review of a company’s performance, with investors often relying on this rating to make informed decisions.
ESG rating companies use:
- Sustainability reports
- Surveys to companies
- Interviews and workshops
Mixed Methods in ESG Auditing
There is a challenge with accurately measuring a company’s environmental and social impact, as ESG ratings are an evolving concept with little clarity on methodologies that need to be used, and it mainly goes unregulated. Often, those providing an ESG rating use in-house statistical models to create estimates, whilst diverse data collection processes can lead to inconsistent results.
What’s more, there may be a conflict of interest with companies providing consultancy to the businesses they rate, as well as possible prejudice to developing countries.
A lack of clarity and direction leads to an incohesive rating model – for example, some companies may assess labour practices based on employee turnover, and another based on the number of employees. Discrepancy in ratings and the reviewing process can lead to impartiality, distorting the overall performance.
It is important for companies to focus on the quantitative areas of a rating, as this can be backed up by information based on actual metrics and data; which will minimise confusion.
ESG agencies must improve communication to gain trust from stakeholders and companies.