Introduction to ESG Ratings

ESG ratings help investors identify and understand financially material, ESG risks at the security and portfolio level. They are based on a two-dimensional materiality framework that measures a company’s exposure to industry-specific material risks and how well a company is managing those risks. ESG ratings are comprised of three things: corporate governance, material ESG issues, and idiosyncratic issues.

They are categorized across five risk levels: negligible, low, medium, high, and severe. They also have a rating scale that starts from 0-100. There are also about 40 industry-specific indicators that give investors a stronger signal into company performance.

At the moment, most international and domestic public companies are being evaluated and rated on their environmental, social, and governance activities by third-party providers of reports and ratings. This means that institutional investors, asset managers, and financial institutions, among other stakeholders now rely on these reports and ratings to assess and evaluate company ESG performance over time.

This assessment often forms the basis of shareholder proposal-related investor engagement with companies on ESG related matters. Although many providers encourage input and engagement with their subject companies, report and rating methodology, scope, and coverage vary greatly among providers.

Here are some examples of ESG ratings provided by some of the rating providers in the market.

MSCI ESG Ratings

MSCI uses a rules-based methodology to identify industry leaders and laggards. Companies on rated on an ‘AAA to CCC’ scale based on their exposure to ESG risks and how well they manage said risks. We also rate countries and mutual funds and ETFs. MSCI ESG Ratings provide insights into potentially significant ESG Risks so you can communicate better with your customers and make better investment decisions.

As of October 2019, MSCI ratings cover 7,500 companies (13,500 issuers including subsidiaries) and more than 650,000 equity and fixed income securities.

This was done by collecting thousands of data points for each company and the application of technology and AI. In addition, a team of 200+ ESG analysts extracts significant insights from unstructured data. Machine learning and natural language processing also serve to improve the timeliness and precision of the collection, analysis, and validation of data.

Bloomberg ESG Data Service

Bloomberg gathers ESG data for over 10,000 publicly-listed companies worldwide. The ESG data is integrated into Bloomberg Equities and Intelligence Services. Bloomberg ESG Disclosure Scores rate companies each year based on their disclosure of quantitative and policy-related ESG data. It has a Mid Cap (more than $2 billion) to Large Cap (more than $10 billion).

Its rating scale is out of 100. Bloomberg also provides scores from third party rating agencies like RobecoSam, Sustainalytics, ISS Quality Score, and CDP Climate Disclosure Score and an overview of a company from an ESG perspective both historically and relative to peers.

 Bloomberg assesses companies on a yearly basis by collecting public ESG information disclosed by companies through company direct contact, sustainability reports, annual reports and websites, and other public sources. This data is checked and standardized. Bloomberg ESG data covers 120 environmental, social, and governance indicators. These include carbon emissions, climate change effect, pollution, waste disposal, renewable energy, resource depletion, supply chain, political contributions, discrimination, diversity, community relations, human rights, cumulative voting, executive compensation, shareholders’ rights, takeover defence, staggered boards, and independent directors. The Bloomberg ESG rating punishes companies for “missing data.” Bloomberg provides ESG data to over 12,200 ESG customers worldwide.

Corporate Knights Global 100

Corporate Knights is a Toronto-based company that publishes an annual index of the Global 100 most sustainable corporations in the world in their Corporate Knights magazine. This magazine is the world’s largest circulating magazine focused on sustainability and responsible business.

Its rating scale is updated daily and is out of 100 and ranked against other companies in the same industry group. Updated annually are companies that have a market capitalization in excess of $2 billion.

The ranking is based on publicly disclosed data and is released annually in January. All industries and topographies are considered, and 14 key performance indicators that cover supplier performance and resource, employee, and financial management are analyzed. Companies are then rated based on their relevant performance indicators for their specific industry.

The Corporate Knights magazine reaches 380,000 of the world’s most influential business and political decision-makers. The Corporate Knights Global 100 data can be found on both Reuters and Bloomberg of the top 10 corporations listed on 2017 Global 100, 4 out of 10 companies had published a press release regarding this listing.

What is ESG Ratings?

ESG ratings help investors identify and understand financially material, ESG risks at the security and portfolio level. They are based on a two-dimensional materiality framework that measures a company’s exposure to industry-specific material risks and how well a company is managing those risks.