Monday, March 4, 2019

What to Do When There are More ESG Ratings than Professional Soccer Teams

Professional soccer teams in the world: 234
Ways to cook an egg: >100
Dog breeds in the world: 202
Languages spoken in China: 299
Environmental, Social and Governance (ESG) ratings: >600
600? “Are you kidding me?” was my initial response when I read the introduction to the just-released Rate the Raters 2019:  Expert Survey Results this past weekend. And then I harkened back to the not-so-distant days when I was completing these ratings (and rankings and surveys, etc.) for the pharmaceutical giant Merck and recalled the dread I would feel every time a new, unexpected one would pop up in my in-box.
The 2019 report follows the first Rate the Raters survey published by SustainAbility almost a decade ago. Like the original, it polled thousands of sustainability/ESG/CR professionals (the majority from companies but also some from academia, NGOs and government) to assess views on what makes a good sustainability rating and which professionals see as being the highest value and usefulness.
If you have limited resources (and what ESG/CR team doesn’t?), here is assistance to help you prioritize.
Out of 600 rating tools, Rate the Raters found four rose to the top: RobecoSAM (which is what the Dow Jones Sustainability Index is based on), CDP (Carbon Disclosure Project), MSCI and Sustainalytics.
Survey respondents chose these four based on their trustworthiness and the ratings’ transparency of data sources, and the robustness of their methodologies. Another factor was experience and competence of the research team. I was never so frustrated as when I spent days completing a rating survey only to speak with an analyst who clearly knew next to nothing about my industry and had not taken the time to even review the information on our corporate website and published materials.
A second aspect of Rate the Raters was surveying ESG/CR professionals on the usefulness of the ratings. On this dimension, usefulness to the organizations completing the surveys scored lower than quality of the ratings themselves.  That’s not to imply, of course, that respondents find them completely useless. CR professionals responded that they use them to inform decision-making such as what data to disclose, to identify trends, and to support stakeholder engagement.
Respondents also had the chance to turn the table on the rating agencies and offer their feedback and recommendations. Their advice?
·       Make your ratings easier for us to respond to and make it easier for us to engage with you.
·       Tie ratings to sustainability thresholds and systemic changes. One respondent offered that he/she would “like to see a threshold for contributing/undermining the future we want (e.g., future fitness and/or emitting vs. drawing down more CO2).”
·       Move toward industry-specific materiality and normalization within industries.
But, by far, my favorite recommendation was to move away from ratings all together. One comment summed it up perfectly: “I would actually like to see these ratings become irrelevant and replaced by higher engagement between companies and investors – the ratings are never going to accurately capture sustainability performance.”
True as this statement may be, as ESG professionals we recognize that ratings are an efficient tool for asset managers and other stakeholders to inform their decision making about companies, especially when  their resources are limited as well. And, the need for ratings will only increase as more mainstream investors such as Vanguard, Blackrock and State Street begin to integrate ESG data into their products and investment decision making (which is a good thing).
So, I guess the ratings will be a little like going to the dentist twice a year. You don’t really love going, but you know you must. Let’s just find as efficient and painless a way as possible to extract the data and make the engagement as enjoyable as possible.

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