A couple of the primary Environmental Social and Governance rating agencies are Sustainalytics and MSCI. There are many “second tier” rating agencies. ESG ratings agencies are the sad sack of the ESG industry. Many ESG professionals criticize their accuracy. Rating agencies are often the whipping boy of the industries, people and things that they rate. Few people have a good word to say about rating agencies and yet rating agencies there have always been and ratings agencies there will always be.
Some comparable rating agencies are the financial rating agencies such as Fitch Ratings, Moody’s and Standard and Poor’s. Nobody thinks they are going away even though they had an epic ratings failure during the 2008 financial crisis.
We should try to get ESG ratings agencies information that will help them improve the accuracy of our organization’s ESG rating. We need to do MORE THAN publish an annual ESG or sustainability report. Many investors and investment advisors want ESG data. The only practical way to get ESG data on a company is from an ESG ratings agency, so they are very important. A key fact in all this is that the ESG ratings agencies are only one of a half dozen very good reasons to promote your ESG efforts. Suffice it to say… any effort to tell the public about your ESG program will pay dividends (pun intended).
ESG ratings biggest risk of failure is simply not having all your ESG data and/or erroneously reporting inaccurate, negative data about your ESG program. ESG data collection on thousands of companies is understandably flawed. If you don’t disclose everything you are doing in your ESG program, there is no way you will get the rating you deserve. Much of what agencies need to know about your ESG efforts does not find its way into their ESG ratings database… the database from which they derive an ESG score to give investors.
I cofounded two organizations that helped many companies improve the outside world’s perspective of their company’s compliance and ethics programs… the Society of Corporate Compliance and Ethics and the Health Care Compliance Association. There were no compliance program rating agencies and yet many companies told the world about their compliance and ethics programs through our two organizations. SCCE and HCCA provided a half dozen ways to promote your compliance and ethics efforts and all of these efforts would work for promoting your ESG program. There are many benefits of promoting your ESG efforts.
- Positively impact future government investigations
- Attract better employees
- Retain good employees
- Impact those who might invest in our company
- Partnerships with other organization could be stronger
- Get better discussion about your company on social media
- Help the press say positive things
- Avoid becoming the target of activists
All those benefits apply to ESG even if ESG rating agencies go away… which I definitely would not count on.
So, it’s worth it to make an effort to let rating agencies and everyone else know about your Environmental, Social and Governance efforts. I would work with your leadership and relevant departments to get the word out as broadly as possible.