Rating the ESG Rating Agencies

We’ve been asked many times about ESG rating agencies’ lack of consistency in ratings, and at Changing Habits Solutions (CHS), we believe that it is through consistent, comparable and verifiable metrics, with transparency in how the data was collected and/or estimated, that we will increase the quality of the information.

Below article from the Financial Times can provide some additional insights:

The raters are growing in influence — but research by three academics questions the way they work

“As reliance increases on the rating agencies that evaluate companies’ performance on environmental, social and governance metrics, there is a growing need for tougher scrutiny, regulation and reform of the raters’ own practices.”

“Investors around the world rely increasingly on ESG rating agencies, which have become influential in guiding the decisions of retail investors, asset managers and corporate managers alike”

“One legitimate reason for differing ratings is their varying objectives. Some emphasise impact materiality, which assesses pollution based on its ecological harm. Others concentrate on financial materiality, whereby pollution is a concern only if it incurs costs for the company. This fundamental difference will obviously lead to different rating outcomes.“

“The solution is greater transparency about what a rating seeks to measure, and the methodology behind it. Users should be able to scrutinise the way the data is collected and aggregated, and whether that is consistent with the rating’s objective.”

“The future of ESG rating agencies hinges on regulatory action to establish standardised reporting for companies and maintain a competitive market that promotes quality and efficiency. Emphasising transparency, addressing conflicts of interest and refining methodologies will help ESG ratings better serve investors and society at large in a rapidly changing landscape.”

References:

Financial Times 2023, Rating the ESG rating agencies

How do companies navigate among the different ESG rating agencies?

Companies need to prioritize critical fundamentals: establishing robust data infrastructure and implementing diligent data collection that adhere to quality and standardization. With your company’s ESG information well organized, you’ll find that clear and transparent reporting becomes an invaluable asset under any ESG rating’s scrutiny.

At CHS, our expertise lies in data integration that empowers companies to ultimately take control of their own ESG data management.