Narendra Tiwari: Building ESG: The Rise of ESG Rating Providers

Many thanks to Narendra Tiwari for permission to post this article:

With growing interest in ESG criteria, investors need a way to objectively asses the ESG performance of a company. 

This has led to the flourishing of a number of ESG Rating Agencies such as Sustainalytics  MSCI Inc. and FTSE Russell, An LSEG Business who asses companies globally on their ESG performance and make this data available to their clients.

These ESG ratings are designed to help investors identify and understand financially material ESG risks to a business. Companies are evaluated based on publicly available information such as media sources and annual reports, with scores given for each material ‘E’, ‘S’ and ‘G’ topic, alongside an overall score.

– How companies can use ratings –

With investors using ESG scores in their investment strategies, the consequences of a poor rating can be significant.  If, for instance, your company were to receive a poor rating from one ESG data provider, your stock may be considered an ‘unsustainable asset’ by investors and excluded from their investment portfolio. If multiple investors follow this reasoning, this can eventually negatively impact your stock price.

In Europe, where nearly 50% of assets are managed with ‘Principles for Responsible Investment criteria, understanding your ESG scores and improving year-on-year is important for your company to continue to attract investment.

It is important to recognise, also, that ratings are can be a very valuable internal benchmarking tool to guide decision making and improve sustainability performance. 

An evaluation by an external expert on your company’s ESG performance gives an independent view on performance, and how it compares to competitors and peers. 

Whilst new players are emerging, financial services firms are consolidating the larger players under their brands. Notable examples include:
ISS ESG acquisition of oekom research Aktiengesellschaft in 2018
MSCI Inc. acquisition of GMI Ratings 
in 2014 and @Carbon Delta in 2019
* Moody’s acquisition of Vigeo Eiris (V.E) in 2019
S&P Global Ratings acquisition of Trucost in 2016 and the ESG rating business of RobecoSam USA Inc in 2019
MorningStars acquisition of Sustainalytics in 2020
Deutsche Börse acquisition of ISS | Institutional Shareholder Services in 2020

Image show Rating scale and other differences within various rating agencies available in the market, Image Source SquareWell Partners  

(Disclaimer: Views are personal, should not be related to organisations view)

Global Reporting Initiative (GRI) FSB Task Force on Climate-related Financial Disclosures (TCFD) 


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