ESG Rating Agencies Report
ERM, an international sustainability consulting company, released a report on ESG rating agencies, analyzing the current development of ESG rating agencies from both investors and enterprises, and proposing measures to improve the ESG rating ecosystem.
ERM believes that although the market has gradually increased the use of ESG ratings, there are still shortcomings in the transparency and comparability of ratings. Rating agencies need to adapt to changing market trends, improve data quality, and improve standardized ratings in order to strengthen their credibility.
ESG Rating Agencies and Rating Contents
As a participant in ESG and sustainable ecosystems, ESG rating agencies provide ratings, data, and related products. ESG ratings include both subjective judgment and objective data. Rating agencies process the sustainability information of enterprises to obtain decision-making information that is valuable to investors.
Common ESG rating activities include:
- ESG Rating: Analyze ESG data to obtain corresponding scores and ratings;
- ESG Ranking: Ranking ESG scores from the best to the worst;
- ESG data: Quantitative and qualitative information required in ESG scoring;
- ESG Metric: Method for calculating ESG ratings;
In the ESG rating process, common data categories are:
- Performance Factors: ESG performance of a company;
- Disclosure Factors: Openness of company data;
- Risk Factors: Potential ESG risks faced by companies;
- Controversy Data: Negative information related to the company;
- Peer Data: Information about relative competitors;
Investor Perceptions of ESG Ratings
Investors are the main users of ESG ratings. Among the investor groups surveyed by ERM, 69% of investors often use ESG rating data (previously 65%), while only 6% never use ESG rating data (previously 21%). In terms of rating agencies, three institutions most familiar to investors are Sustainalytics, MSCI, and CDP, accounting for 74%, 64%, and 64%, respectively.
Investors’ attitudes towards a single ESG rating agency have also changed. Taking CDP as an example, 56% of respondents believe that its data quality meets the standard, an increase of 2 percentage points compared to previous surveys. At the same time, the proportion of investors who hold negative comments on rating agencies is also decreasing, while the proportion of neutral and positive attitudes is increasing.
In addition to the changes in investors’ attitudes towards ESG rating agencies, their companies have also begun to require them to use ESG rating data, with the proportion increasing from 12% to 43%. Stakeholders, such as clients of investment institutions, have also begun to require the use of these data, increasing the proportion from 35% to 50%.
Enterprise Perceptions of ESG Ratings
Enterprises have an important cooperative relationship with ESG rating agencies, which provide ESG ratings to enterprises by obtaining relevant information about the enterprise. Companies use these ratings to showcase ESG development to investors and financial institutions, and gain potential investment and financing opportunities.
Among many rating agencies, companies most prefer CDP and S&P, which take active rating measures and require companies to provide numerous data interactions. Companies believe that these first-hand data make them more effective in terms of quality and accuracy. Among the reasons for cooperation between enterprises and rating agencies, the demand of investors ranks first (57%), followed by the requirements for enterprise performance measurement (21%) and the need for enterprise strategic development (7%).
At the same time, companies have also raised some challenges in using ESG ratings. For example, various rating companies have different rating systems, making it difficult for enterprises to obtain information from different ratings. According to corporate evaluations of ESG rating agencies, the quality rating decreased from 3.54 to 3.27, and the usability rating decreased from 3.34 to 3.17. This indicates that rating agencies need to continue to improve in these two areas.