ESG ratings alone are not enough
As ESG performance has become an essential; and with sustainability on the minds of investors and shareholders across the globe, it is no surprise that businesses are looking for short-term validation of their ESG efforts in the form of an ESG rating. Whilst they are an excellent step for companies to publicly disclose their sustainability efforts in the form of the ratings and we encourage businesses to do so, an average-good ESG rating does not guarantee a business long-term resilience. Future-proofing and forward-looking ESG strategies is what we believe organisations should be investing in.
What has spurred on the ESG ratings boom?
ESG ratings are designed to measure a company’s resilience to long-term, industry-specific ESG risks. No ESG rating is the same: each ratings company has a different focus area and methodology, which means that organisations often align themselves to two or three ratings platforms in order to get a more comprehensive overview. Sustainalytics and MSCI being two big players in the ESG rating arena rate over 20,000 companies combined. This rapid growth has been prompted by investors’ increased interest in ESG integration and by the rise in corporate reporting and public disclosure.
Why ESG ratings are one input among many
Research by SustainAbility found that 65% investors look at ESG ratings at least once a week. However, investors insisted that they use the data but explicitly not the scores from an ESG rating to inform their internal research, hereby establishing their own view on the company’s performance. This suggests that whilst ratings are a useful starting point and are an excellent peer-benchmarking tool, the rankings are one piece of the puzzle for investors.
Once businesses have understood their ESG scores and made any necessary steps to improve their performance on the ratings platforms, organisations should also look towards aligning themselves with recognised standards and frameworks that investors will recognise. A positive association and engagement with global standards and initiatives shows that the company is joining ranks with others who acknowledge their impact on the world and are making steps to mitigate this.
Future proofing: focusing on wider-ESG and sustainability best practice
With 90% businesses now reporting on sustainability, in order to satisfy investors and improve overall ESG performance, companies need to widen their gaze to sector-specific ESG and sustainability best practice. Research from McKinsey states from over 2,000 academic studies conducted, 70% of them find a positive relationship between strong ESG performance and financial returns. There is also evidence that brands with a more sustainable impact are growing faster than those who do not: businesses who want to grow need to channel ESG through their value chain.
Sustainability best practice is dependent on the business sector, but there are elements that are applicable across all companies. Organisations should ensure that they are looking at all material elements of sustainability, beyond the very important environment metrics. Gender and race equality, diversity and inclusion, human rights, business ethics, responsible investing and community outreach all create the patchwork of the overall sustainability/ESG strategy business. Researching competitors and having a strong, ethical and innovative approach to every aspect of the business will help to achieve what the long-term goal is: a fundamental culture shift towards a wholly positive way of operating.
As ESG Consultants, we work with clients to develop robust ESG strategies which look beyond ESG ratings and supports the development of a resilient business.
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