The role of ESG ratings in business and investment
ESG (Environmental, Social, Governance) ratings are a tool for assessing companies in terms of their environmental impact, social responsibility and governance quality. Each of the three pillars includes specific criteria such as:
E (Environmental): greenhouse gas emissions, energy consumption, waste management, water resource management.
S (Social): working conditions, relations with local communities, diversity and inclusion, human rights.
G (Governance): board structure, anti-corruption practices, financial transparency, shareholder rights.
What are ESG ratings for?
The main purposes of ESG ratings are:
Investment risk assessment. Investors use ESG ratings to assess the risks of investing in specific companies. Companies with high ESG scores are perceived as less risky because they manage resources better, have more stable relationships with stakeholders and are more transparent. Making informed investment decisions. More and more investors are looking for investment opportunities that not only deliver returns, but also have a positive social and environmental impact. ESG ratings help identify such companies. Reputation management. For companies, high ESG ratings demonstrate their commitment to responsible business practices. This helps to build and maintain a good reputation among consumers, employees and business partners.
Benefits of ESG ratings
It is clear that the higher the score in ESG ratings a company receives, the more it gains. So what benefits do ratings bring to companies? Greater awareness. With ratings, companies can more easily identify their strengths and weaknesses in managing sustainability topics. An in-depth analysis of ratings helps, among other things, when developing business strategies. Ratings show where a company should place greater emphasis and thus make it easier to define and plan activities for the coming years in order to improve or at least maintain indicators. They also indicate how the company ranks against the market and its competitors. Better risk management. Companies that take care of ESG aspects often manage risks better, which can lead to fewer scandals, financial penalties or legal problems. The ratings also show whether current risk management strategies are sufficient or whether they may be worth working on further. Sustainable strategy. ESG practices promote long-term thinking and strategy. Companies that invest in sustainable solutions are more resilient to market and regulatory changes. Increased company value. Research shows that companies with high ESG scores often perform better financially over the long term. Investors increasingly recognise that social and environmental responsibility is a key factor in increasing company value. Attracting talent. Younger generations of employees are paying more attention to companies' values and ethics. Employers that can boast high ESG scores have an advantage in attracting and retaining talented employees. Access to capital. Companies with high ESG scores can more easily raise capital. Investors, investment funds and financial institutions are increasingly considering ESG criteria in their investment decisions.
How do rating agencies assess?
There are a number of rating agencies that assess companies in terms of ESG. Each uses its own methodologies and assessment criteria. The most well-known agencies include: MSCI ESG Ratings - MSCI ratings focus on long-term ESG risks and opportunities. The company analyses hundreds of indicators such as greenhouse gas emissions, natural resource management, employee and community relations and board structure. Sustainalytics - assesses companies based on their exposure to and management of ESG risks. Sustainalytics takes a comprehensive approach, considering both quantitative and qualitative data. FTSE Russell - FTSE Russell ESG ratings assess companies in three key areas: environment, society and governance. The company uses differentiated criteria to assess how well companies are performing in terms of sustainability. CDP (Carbon Disclosure Project) - specialises in assessing the impact of companies on climate change, water and forest management. The company analyses how companies report and manage their activities in these areas.
Way to unification
In recent years, discussions have emerged on the need to standardise methodologies for ESG assessment. The diversity of rating agencies' approaches can cause confusion among investors and make it difficult to compare companies' performance. There are organisations, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB), that are trying to create common standards for ESG reporting. Regulators are also striving to harmonise these standards. One of the leading objectives of the new Sustainability Data Reporting Directive (CSRD) was, among others, to harmonise reporting standards, which was also expected to influence the harmonisation of rating methodologies by rating companies. Moreover, some rating agencies are starting to work together to develop more harmonised rating methodologies. An example is the cooperation within the International Organisation of Securities Commissions (IOSCO). However, fully harmonising ESG assessment methodologies is a complex process and may take several years. It requires not only cooperation between agencies, but also the involvement of regulators, investors and companies themselves.
Summary
ESG ratings are becoming an integral part of the modern business and investment world.They help investors to make more informed decisions, companies to manage risk and build sustainable value, and society as a whole to promote more sustainable development.Despite the differences in the assessment methodologies used by different rating agencies, the move towards harmonisation is becoming more and more apparent, with the potential to make the assessment process more transparent and comparable in the future.