An ESG rating is an assessment of how a company manages its environmental, social and corporate governance obligations. It looks at how well a company manages ESG issues that are crucial to its business and provides a score that can be used by investors to make decisions about investments in the company.
As there isn’t a single industry standard to ESG (Environmental, Social, and Corporate Governance) rating, there are various ESG rating frameworks being employed. The most prominent ones are being employed by ESG Rating Agencies.
p.s. if you’re new, read our ESG investing guide first.
What are ESG Rating Agencies?
ESG Rating Agencies assess a company’s ESG quality by looking at how it handles key ESG issues that include environmental policies such as carbon emissions, clean tech, green energy and more, social issues like welfare of its workforce and governance issues like ethics and transparency.
They use publicly available information from the company itself, media sources and interviews with stakeholders to produce an ESG score or ESG rating.
ESG Score vs ESG Rating
Depending on the ESG Rating framework employed by the ESG Rating agency, companies are either given a numerical score or an alphabetical rating that represents how ESG friendly the company is.
Top ESG Rating Agencies you should know
Sustainalytics
Sustainalytics’ framework focuses on risk by measuring both the ESG risk and how the company manages the risk.
For example, if you’re wondering…
“What is Tesla’s ESG score?”
If you’re using Sustainalytics’ ESG Risk Rating, you’ll find that Tesla has an ESG Risk Rating of 28.7 or Medium.
Sustainalytics’ database is free to use at the point of writing. You can access it here to learn more about your favorite stock’s ESG Risk Rating.
MSCI ESG Rating
MSCI provides a ESG Rating between AAA (leader) to CCC (laggard). At the point of writing, you can access their ESG rating of funds and stocks via their website for free.
Again, using Tesla as the case study, we find that MSCI rates Tesla’s ESG Rating at ‘A’, reporting that it is average among 44 companies in the automobiles industry.
Refinitiv
Refinitiv uses a range of ESG factors to rate companies. It’s ESG Rating framework is unique in that it takes into consideration 23 “controversy” topics via its ESGC score, into its rating.
You can learn more about Refinitiv’s ESG methodology and access its ESG Rating database here.
Here’s how Tesla scores on Refinitiv’s ESG Ratings:
S&P Global ESG Scores
S&P Global uses a mix of 600-1000 data points, 80-120 industry specific scores, 16-27 criteria scores and ESG factors to generate an ESG Score between 0 to 100 for any given company, where 100 is the best.
S&P Global releases public reports and ESG Score for selected companies on its website.
FTSE Russell ESG Rating
FTSE rates companies inline with the UN Sustainable Development Goals ESG framework, giving companies a FTSE ESG Rating between 0 to 5 where 5 is the best.
FTSE ESG Rating data is not available publicly.
RepRisk ESG Rating
RepRisk also rates companies based on the UN Sustainable Development Goals ESG framework. It grants companies a rating between AAA to D based on its risk where AAA refers to the lowest risks and D is the highest ESG risk. You can read about their methodology here.
RepRisk ESG Ratings are not publicly available either.
Bloomberg
Bloomberg’s ESG Scoring Framework covers over 2,000 ESG topics, giving a company an ESG score between 0 to 100. You’ll need access to a Bloomberg Terminal subscription to access its ESG score data.
Frequently Asked Questions about ESG Ratings
What is a good ESG score?
The answer to this depends on the ESG Rating Agency and the ESG Rating framework employed.
For a start you can use ESG Rating Agencies like Sustainalytics, MSCI or Refinitiv which provide free access to their database.
However, it is important to do your research and draw conclusions based on industry-specific benchmarks as ESG scores may differ from one sector to another.
What does an ESG score mean?
As mentioned above, this really depends on the ESG scoring framework used.
However, in general, a higher ESG rating usually indicates that the company has better practices when it comes to its sustainability and ethical activities, while a lower ESG rating suggests that the company has weaker practices in this area.
It is important to note that an ESG score should not be seen as a judgment on the entire company, but rather an indicator of its current performance in terms of sustainability and ethical behaviour.
How do you get an ESG rating?
If you’re looking to get an ESG rating for a company, you can use one of the free ESG Rating databases mentioned above.
It is important to remember that while these ratings are useful, they may not provide an accurate picture of a companies performance when it comes to ESG considerations. It is therefore recommended that further research is conducted and that conclusions are drawn based on industry-specific benchmarks.
ESG Ratings can help you gain insights
In conclusion, ESG Ratings help investors gain insight into a company’s sustainability and ethical practices. In order to get an accurate picture, it is important to research further and compare against industry-specific benchmarks.
That said, ESG Ratings should be taken with a pinch of salt. Here’s a paper from the Harvard Law School Forum on Corporate Governance explaining the gaps in the current ESG ratings scene.
This article has only scratched the surface when it comes to ESG ratings, so make sure you do your due diligence and read up more about the topic. Good luck!
