How to Prioritize Corporate ESG Ratings

How many ESG scores does your company have? Chances are, a lot – and that number is growing. The SustainAbility Institute identified over 600 ESG raters and rankings globally. If you’re in an investor relations or sustainability role, you’ve likely been inundated with engagement and survey requests, or questions internally about various ESG scores. Since responding or proactively trying to improve all scores is probably not feasible, how do you know which ESG score to prioritize?

According to a survey conducted by Edelman, 98% of U.S. institutional investors rely on ESG rating agencies as part of investment decisions. Which ESG raters does that typically include? Investors frequently reference ratings from ISS – used by 3,100 investors and companies, MSCI – used by over 1,400 investors, and Sustainalytics – which serves 19 of the top 20 asset managers, is owned by Morningstar, and is incorporated in Morningstar’s research and ratings. So, where should you start? Here are some key factors about ISS, MSCI, and Sustainalytics.

ISS

• ISS ESG products include E&S QualityScore, Governance QualityScore, Climate Awareness Scorecard, and ESG Corporate Rating reports.
• ISS Environmental and Social QualityScore covers over 380 individual factors. The ISS methodology is informed by developments in disclosure standards and frameworks, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) standards, and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
• ISS rates companies on a 1 (high quality) to 10 (low quality) decile scale. The ISS E&S QualityScore is based upon the relative disclosure of a company within its Industry Group (GICS-4), while the Governance QualityScore compares within relevant indices (e.g. S&P 500, R3K, TSX Composite, etc.).
• The ESG Corporate Rating scores companies from D- to A+ based upon an absolute rating of their ESG performance. The emphasis on ESG performance over disclosure, as well as its absolute rating, differentiate it from the ISS QualityScore ratings. This difference means that a company can do very well compared to peers in their industry group, but poorly when rated on an absolute basis.

MSCI

• The MSCI ESG Rating assesses thousands of data points across 37 ESG Key Issues (loosely aligned with TCFD), focusing on the company’s core business and industry issues that create risks and opportunities. MSCI issues a relative score compared to companies’ industry peers.
• The ratings include AAA (best) to CCC (worst).
• MSCI is most utilized by institutional investors and as building tools.

Sustainalytics

• Sustainalytics’ Risk Rating evaluates companies based on exposure to and management of key sustainability issues. Sustainalytics scores are based on a low to high risk ranking, which is evaluated based on over 225 factors related to industry exposure & management performance.
• The Risk Ratings are from 0 (lowest risk exposure) to 100 (highest risk exposure).
• Sustainalytics is owned by Morningstar and is included in most fund reports along with a rating.

How ESG Infinite can help.

With ESG Infinite, you can access the key issues impacting your ESG scores, learn how and when to engage with ESG rating agencies, and the frameworks or data sources raters use, along with additional insights. If you’re interested in taking the reins on your ESG strategy, contact us today and gain the knowledge you need to navigate the next steps of your ESG program.