How can we better understand the ESG ratings landscape and provide perspectives to help companies, investors and other stakeholders derive more value from ratings?
As the August heat wave in western Europe breaks temperature records across the continent, this question has never been more important. This article explores some of the contemporary themes in the world of ESG ratings by examining the key summer announcements from leading rating outfits, namely ISS, Sustainalytics and CDP.
Mergers and Acquisitions
This month, ISS Market Intelligence (ISS MI), announced the acquisition of Flowspring, a leading provider of advanced competitive intelligence for asset managers. During the last decade, we have seen increased complexity in the ESG landscape, as more traditional investment data providers, credit rating agencies and others have entered the ratings marketplace, driving M&A activity. The ISS announcement marks the latest in a wave of high-profile examples, including Moody’s acquisition of a majority stake in Vigeo Eiris as well as S&P Global’s purchase of the ESG business of RobecoSAM, including its well-known Corporate Sustainability Assessment (CSA), which underpins the Dow Jones Sustainability Index.
With ESG rating management often requiring hundreds of hours and multiple dedicated staff, it is no surprise that companies are joining forces to navigate complexity and get investors the information they need. With small and midsize companies with ever fewer comparative resources, we can expect that acquisition announcements such as these will continue to be an integral part of the rating landscape.
In July, Sustainalytics announced the move to make its public company ESG ratings available on its website, a list which numbers over 4,000 companies. This reflects a wider industry shift to demonstrate improved quality and disclosure of methodology. This theme was highlighted as a top priority amongst ESG Industry peers in the 2019 Rate the Raters Report.
From institutional asset managers and pension plan sponsors to wealth advisors and retail investors, interest in ESG investing is accelerating rapidly across all types of investor. By making this data easily accessible and consumable, all financial market stakeholders achieve greater insight into the material ESG risks of different companies. Indeed, Sustainalytics showed leadership on this front in 2018, becoming the first major ESG ratings firm to provide public access to its ESG ratings and data through Yahoo! Finance. Sustainalytics’ latest effort further demonstrates the growing importance of transparency and knowledge-sharing to standardise ESG ratings and data. Expect more of the same across the industry.
Greater focus on relevant material issues
Until now, ratings agencies have consistently scored higher on quality than usefulness This might be all about to shift with the announcement in July that CDP will pioneer new temperature ratings of companies for investors. The new ratings reflect the material climate change likely to occur if global GHG emissions are reduced at the same speed as the selected company’s emissions, based on its stated target ambition.
This move ties together investment and the 1.5°C cap rise in global temperature which science dictates would avoid the worst effects of climate change. Currently, climate action is consistent with limiting warming to 3.2°C by the end of the century. This would devastate markets and much of life on earth. By mapping out exactly how company commitments translate into global temperature rises, CDP have made a welcome contribution to the industry efforts towards more relevant stakeholder information.
What is the future for ESG ratings?
The recent announcements at ISS, Sustainalytics and CDP give us an insight into the busy and constantly changing ESG landscape. In the future, we will see companies derive more value from ratings agencies through the provision of real time data in shorter reports, there are also expectations that ESG will become better integrated into traditional financial reporting and research. Governmental regulation could aid the value placed on ESG ratings, but whether this can be achieved in today’s global political landscape is another question entirely.
There is certainly room for improvement in ESG ratings to help companies, investors and other stakeholders derive greater value from ratings. Nevertheless, few will question the key role rating providers have played in the integration of sustainability concepts into the investment lexicon. They have not only promoted greater awareness of ESG issues but have educated the investment community on how those issues are relevant to businesses. As such their major role in driving sustainability towards the centre of investment thinking and practice is beyond question.