Is it time you got an ESG rating?

As sustainability becomes more important to both corporates and investors, there is a need for accurate, reliable information and ratings.

Historically, it has been challenging to understand much of the information associated with sustainability – it covers a wide range of areas, many of which have no standardised measures. However, a number of companies are bringing clarity to the world of sustainability through ratings and other information.

This development is timely, given the groundswell of interest among investors in sustainability, often labelled corporate social responsibility (CSR) or environmental, social and governance (ESG). Bob Mann, president and chief operating officer of Sustainalytics, an independent global provider of ESG and corporate governance research and ratings, says there is growing awareness of ESG among investors worldwide.

“One of the drivers is simply that as awareness increases in one region, a virtuous circle occurs,” explains Mann. “That makes it easier for international corporate issuers to meet the expectations of investors worldwide and adhere to ESG standards.”

At the same time, ESG information is being demanded by a wider range of stakeholders, not only for reporting and regulatory requirements, but as a key factor in business relationships, supply chains and investment, according to Pierre-Francois Thaler, co-founder and co-CEO of EcoVadis, which provides sustainability ratings and scorecards to help procurement teams monitor supply chain CSR/ESG practices across 190 sectors and 150 countries.

Different strokes

In the credit ratings industry, there are a variety of approaches – ranging from Standard & Poor’s to Dun & Bradstreet – depending on the size of the company and the purpose of the rating. ESG ratings vary in a similar way.

Sustainalytics provides ESG and corporate governance research and ratings to investors, rating 10,000 companies a year, as well as loan, bond or issuer rating services to corporates. This latter market is growing rapidly, according to Mann. “In our first year we assessed 35 companies; in our second 100; this year we are on track to assess between 150 and 170 companies,” he says.

The company issues two types of ratings to companies. In association with the issuance of green loans and bonds, Sustainalytics certifies the use of proceeds as sustainable. A second category rates the issuer itself. “Companies have made significant improvements in ESG and want that information to be more widely appreciated,” explains Mann. Issuer ratings can also be used for borrowing linked to overall sustainability performance rather than use of proceeds, as with INGs’ sustainability improvement loans.

EcoVadis has rated over 45,000 companies that share their results with over 200 of the world’s largest corporates. Companies use its ratings to enhance their brands and demonstrate their commitment to sustainability – both externally with customers and stakeholders and internally with employees and for recruiting. “Companies use our ratings to benchmark and guide improvements in sustainability performance, and use the data when reporting to other evaluations and indices,” says Thaler. “Our ratings have also been adopted by six industry initiatives such as chemicals, consumer goods, rail and beauty as a standard for entire supply categories.”

EcoVadis’s ratings are also now used to underpin ING’s sustainability improvement loans, which incentivise and reward sustainability performance. Businesses’ sustainability performance is tracked over time using the rating; as the sustainability score improves, the interest rate decreases. EcoVadis scores are used to measure sustainability performance primarily for borrowing companies that are not listed on a stock exchange (where published information is not always available).

How companies use ratings internally

As well as facilitating borrowing or enabling suppliers to demonstrate their credentials to potential buying companies or lenders, sustainability can be valuable for internal benchmarking and even decision making.

“An evaluation by an external expert with broad global benchmarks can give CSR professionals and executives an independent view on their performance, and how it compares to peers,” says Thaler. “This can be a powerful incentive for taking action and steps toward increasing performance.” CFOs can use a rating as a quantitative measure, to see how investments improve performance over time, he adds. Larger groups, such as Toyota Material Handling (which makes forklifts) and vehicle glass repair and replacement firm Belron, use EcoVadis Ratings as a global standard to align their sustainability performance across many subsidiary entities around the world.

Mann says that assessments can provide a valid source of information that helps internal advocates to promote change. Moreover, ESG information is typically comparable across an industry so it can prove helpful to understand relative performance compared to peer companies. Sustainalytics also shares best practices with corporates that enable them to understand the changes they need to make.

A pain-free process

While companies may be apprehensive about the time and effort involved in seeking a sustainability rating, the process is straightforward.

An EcoVadis rating simply requires a company to register and answer an online questionnaire covering 21 CSR criteria across four themes: environment, labour/social, ethics, and sustainable supply (relating to sourcing practices). The process also includes what the company describes as “a 360 degree watch”, which checks over 2,500 sources including Regulatory DataCorp watch lists and sanction lists, and thousands of local news sources, all of which may be factored into the evaluation.

For a green loan or bond where Sustainalytics’ opinion is being sought about whether the use of proceeds is green and will make a difference to sustainability, the rating process generally takes about a month. Where a company is seeking an issuer rating, for example if it wanted to borrow using ING’s sustainability improvement loan, which is linked to the company’s sustainability performance rather than the use of proceeds, the process is more meaningful, involves a wider range of parties within a company, including finance and sustainability, and for that reason takes longer, explains Mann.

A bright future

As the importance of sustainability grows for investors and stakeholders, ways of demonstrating it are likely to gain greater prominence. Thaler says that the expansion of the use of EcoVadis’s ratings beyond supply chains to lending relationships, presages many other similar uses yet to come, “where trust and transparency build value in relationships”.

Indeed, the disparate nature of ESG – ranging from the environment to governance – which can make the topic hard to measure and understand, makes independent verification all the more important. “The first step is to establish transparent indicators,” says Mann. “That’s where we fit in.”

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