The Chancellor of the Exchequer Jeremy Hunt recently announced at Spring Budget 2024 that the UK Government plans to "regulate the provision of ESG Ratings, where these assessments of ESG factors are used for investment decisions and influence capital allocation." So, why are ESG ratings agencies valuable, how do they differ, and how can companies ensure ESG ratings are based on accurate information?
Background
Environmental, Social and Governance (ESG) rating agencies are used by stakeholders, principally investors to evaluate how corporates manage their ESG risks and opportunities. Many larger investors will often use the agencies’ data to populate their own bespoke ESG models while using the scores as an investment screen and a sense check of their own analysis. Ensuring the quality of the data that ESG rating agencies use in their ESG scores and products helps to avoid misinformation being delivered to key stakeholders. Taking measures to address rating agencies within the annual reporting season and engagement to ensure accurate information can make the difference between ESG letter ratings and investment inclusion.
Although not new, ESG rating agencies have been increasingly under the spotlight as the assets under management (AUM) associated with ESG mandates have grown significantly in recent years. This attention has put a focus on the quality and methodologies of their analysis. The industry is dominated by a handful of providers, such as MSCI and Sustainalytics. Each has developed a slightly different perspective on how a company should manage ESG issues. A recent paper by the European Securities and Markets Authority (ESMA) found significant differences between a company’s ESG scores when compared to the narrow spread of its credit ratings.
Engagement
One way to ensure accurate information is used by ESG rating agencies is engagement. Rating agencies can be engaged in a number of ways depending on their analysis process. Some entail submissions (e.g., CDP, S&P), some allow input after they have reviewed a company’s public disclosure (e.g., Sustainalytics), and others allow engagement at any time or a combination of the above. Because of these differences and the time it takes to engage, it can be difficult to effectively address each rating agencies’ timelines and unique methodologies. However, ensuring that the latest public corporate disclosures, such as annual reports and/or sustainability reports, are accurately reflected by the rating agencies, can have significant impacts on ESG ratings and research products.
How can we help
CEN-ESG helps businesses maximise their sustainability potential, performance and ESG disclosure. We can advise, manage, or be your in-house ESG team when dealing with ESG rating agencies.
Cascade, our proprietary ESG assessment framework, underpins our process and delivers actionable enhanced disclosure recommendations for our clients. It enables companies to share the right quantitative and qualitative information to all stakeholders including rating agencies.
Contact us
If you would like more information about ESG ratings agencies or how to improve your company’s sustainability ratings, our team would be more than happy to help.
Jasper Crone, Director
Roger Johnston, Director
For more information about our Sustainability Consultancy, Investor Relations, or CEN Data services and expertise, please click on Services above or go to https://www.cengroupholdings.com.
Cover photo by Karsten Würth on Unsplash
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