How Companies Can Improve their Investor Rating Scores on ESG

As investors increasingly push to assess companies’ Environmental, Social and Governance (ESG) performance, our publicly traded clients and potential clients often ask us how they can improve their investor rating scores.  This question is more complicated than it seems.  We spent some time over the past few months analyzing trends and distilling our thoughts to provide some simple guidance to companies just starting off on their ESG journeys which we published in our recent white paper.

Start with Materiality

Investors want to know that a company has diligently assessed the issues that will have the greatest impact on its finances and business continuity.  Thus, our first recommendation is to complete a simple materiality analysis if at all possible.  A company has the best chance of improving its ESG performance—and ultimately its investor rating scores—by tailoring its ESG strategy and metrics to specific material issues.

Our Research

We looked at six entities that are most frequently used or referenced by our corporate clients: SASB, MSCI, ISS, Sustainalytics, Vigeo-Eiris, and BlackRock.  All of these frameworks focus on investors, in contrast with other frameworks that may have a wider target audience.  (To understand more about our methodology, please see our white paper.)

What Does SustainabilityNext Research Say?

The “top 10 topics” chart below shows that environmental and social issues are fairly evenly covered by investor surveys and requests for information.

ENVIRONMENTAL ISSUES

On the environmental side, emissions of greenhouse gases (GHGs) and other substances are consistently among the key topics of interest to investors.  Beyond the six entities we studied, other reporting platforms such as CDP and TCFD focus almost exclusively on greenhouse gas emissions and climate risk disclosures.  Energy use is closely linked to GHG emissions.  With a clear focus on companies’ bottom line, investors want to see metrics that demonstrate increased energy efficiency and a movement toward decarbonizing energy sources.

For many companies at the beginning of their ESG journeys, focusing on environmental issues makes sense because projects that reduce energy, emissions or waste often produce clear and tangible financial ROI. Also, environmental projects typically yield straightforward metrics to show progress.

Click here to learn more about some of the concrete impacts our clients have achieved.

SOCIAL ISSUES

Although data on the benefits of pursuing social issues has been slower to develop, investors are starting to pay more attention to this area. Our research shows that investors are scoring companies on their labor management practices and overall work environment, including health and safety, training and education, and diversity and inclusion.  Investors are expecting companies to establish policies and set measurable goals and milestones.

In our work with companies over the past seven years, we have seen businesses struggle with programs and KPIs in many of these social areas. As a result, companies often receive low social scores from investor rating agencies.

GOVERNANCE

While no governance issues made our overall “top 10” list, several appeared in 5 out of 6 frameworks. (For a list of top Governance topics, see white paper.)

Investors remain interested in whether a company has a board committee focused on corporate social responsibility, as well as in the composition of the board as it relates to various diversity aspects such as race, gender, age, and professional experience and skills. We also see that investors have been looking at linkages between remuneration and compensation policies and processes and ESG or other non-financial targets, as well as transparency around payment philosophy and performance.

Where are We Headed?

Since the beginning of the global health pandemic in early 2020, many questions have arisen about whether investors will continue to focus on ESG issues as we fall into an economic recession.  Experts ranging from UBS to CitiBank to Blackrock echo a resounding “yes”.  The data is starting to show that companies with robust ESG strategies and metrics are more resilient and have fared better during this crisis. 

While we strongly urge every company to conduct its own materiality assessment and research to determine the right set of material issues and metrics to disclose, our “top 10” topics can serve as a starting point alongside the list of key governance topics.  We are interested in seeing how future investor surveys and questionnaires will reflect the new reality brought about by COVID-19 and the social justice movements sweeping the globe (such as the Black Lives Matter movement) as investors assess whether companies are well-positioned for the future.

Disclaimer: This information has been prepared by SustainabilityNext for informational purposes only and is provided with no representation or warranty as to its accuracy or completeness.  Nothing contained herein should be construed nor relied upon as investment, financial, legal, or tax advice.  SustainabilityNext is not responsible for any damages or losses arising from any use of this information.