Among the numerous constructive recommendations for companies included in SquareWell Partners’: “Managing ESG Data and Rating Risk”* (many of which echo the guidance provided in relevant panel discussions at the Society’s virtual national conference last week) are these:
- Prioritize which ESG ratings and data providers to monitor based on their use by your investors, their influence on the composition of the main ESG indices, media exposure, and reputational impact.
- Determine which ESG topics are considered material for your industry by major ESG ratings and data providers and other stakeholders and compare that information with your company’s internal materiality assessment to understand the gaps.
- Use ESG ratings to conduct peer benchmarking and to identify potential strengths and weaknesses in your current ESG practices and disclosures.
- Keep your sustainability-related disclosure and language simple and avoid complicated graphics so that relevant information can be captured by AI-enhanced technology.
- Disclose your current ESG practices and disclosures on your website (in an easy-to-find location) to ensure that third parties and investors have access to the most current information.
- Establish a relationship with the main ESG ratings and data providers to understand their rating cycles and the timing of your company’s assessment to better manage your time and resources.
- Conduct annual ESG roadshows to communicate your company’s ESG story and understand your investors’ priorities.
The informative report provides insights into investors’ views about, and use of, third-party and proprietary ESG ratings and rankings; the bases for significant variability and inconsistencies among data and scores/rankings offered by different providers; and investors’ overall acceptance, if not endorsement, of differences among raters and ratings provided they understand each rater’s approach and methodology.
Importantly, the report reminds companies that while investors may not care about diverging scores and ratings so long as they understand the basis for that divergence, the ratings/scores are in fact used to determine which companies are included in ESG indices, which drive investments. The recommendations to companies are offered in that practical context.
The Appendix includes a list of the ESG ratings and data providers used by the 40 ESG Exchange-Traded Funds (including 15 discrete BlackRock funds) with assets in excess of $1 billion as of December 31, 2020.
*Request the complimentary report through the firm's website here.
See our recent reports: “Study Shows Widespread Use of 3rd Party and Proprietary ESG Ratings,” and “ESG: Institutional Investors’ Preferences & Approaches Vary,” and additional information & resources on our Sustainability page.
This post first appeared in the weekly Society Alert!