Tips for Developing a Strategy to Enhance Your ESG Ratings

Published: March 2022

 

The range of environmental, social and governance (ESG) ratings in the marketplace can be complex for companies to navigate. Our tips can help companies manage ratings and enhance ESG strategy.     

Since 1999, when the world’s first global sustainability index was introduced, ESG risks have steadily moved to the top of the agenda for many investors, shareholders and regulators. Today, ratings are used more than ever before to assess a company’s exposure to long-term ESG risks.

For many companies, progressing effectively from a practical to tactical approach to managing and disclosing ESG information should be the primary goal. Organizations that are new to ESG ratings can benefit from proactive management of ESG reporting to ensure that ratings providers use accurate information.

Before interacting with ESG ratings providers, companies should look to address two main challenges: sorting out the many ESG ratings and methodologies and dedicating the resources necessary to manage the flood of ESG data verification opportunities.

Here are several steps that your organization can take to manage ESG ratings and stay ahead of investor and regulatory scrutiny.

Decide Which ESG Ratings Providers Merit Your Primary Focus

The first step an organization should take is deciding which ESG ratings providers to prioritize. Consider the following questions when determining which ratings providers to engage with and follow:

  • What is your company’s primary purpose for engaging ESG ratings providers? You may be looking to inform investors about ESG practices, improve ratings, create an accurate ESG benchmark for internal strategy or conduct an ESG gap analysis. Establishing the primary goal(s) you want to accomplish through engagement can help maintain focus in the face of myriad ESG ratings providers, data points and methodologies.
  • What ESG ratings providers are most relevant to your industry, stakeholder influence, and governance priorities? Boards may be most sensitive to ESG ratings providers that serve as proxy advisory firms. For example, ISS has long provided proprietary ESG ratings, while Glass Lewis has recently launched the Glass Lewis ESG Profile with several underlying ESG scores. Investors may be most concerned with firms that serve as ESG dataset providers, like CDP, DJSI and MSCI ESG Indexes.
  • What is your company’s capacity to engage with ESG ratings providers? Providers require varying degrees of time commitment on the part of the business so determining in advance what resources may be needed will increase the likelihood of successful engagement

We encourage companies to ask these questions while considering the representative listing of ESG ratings providers provided at the end of this article (see appendices A, B and C). We grouped these ESG ratings providers into tiers based on their reach and your opportunity to verify company data.

Figure 1 — Establish a Process for Managing ESG Ratings

Source: Aon

Improve Your ESG Disclosure Strategy

Once you have prioritized ratings providers for engagement, the more resource-intensive work of improving your organization’s ESG ratings can take shape. We encourage you to consider these organizational goals and actions:

  • Encourage greater transparency and accessible disclosure of material impacts. Streamline reporting of ESG information into an ESG framework offered by the Sustainability Accounting Standards Board (SASB) or the Task Force on Climate-Related Financial Disclosures (TCFD). Your company may improve ratings by making more of its ESG-related strategies, policies, metrics and oversight accessible. Look to industry leaders, regulators, listing exchanges and ESG ratings providers’ surveys for guidance on new disclosure language and where to disclose information.
  • Lighten the load for ESG analysts. Ensure your ESG information details specific initiatives, business coverage and outcomes versus general language especially where ratings providers are looking at ESG-related strategy and programs. This is important if providers are using inaccurate or outdated information on your business or if analysts require a public source to verify implementation of strategy. If private information is allowed you will most likely be required to submit a current form of verification (e.g., internal policy, SOP, etc.).
  • Engage with ESG ratings providers. Many ESG ratings providers and ESG advisory firms provide paid services that support companies with more in-depth ESG rating analysis, best-in-class disclosures and other information that can help a business improve its ratings. Building a relationship with the ratings analyst team that covers your company will keep them abreast of your organization’s ESG milestones to ensure timely updates

Next Steps

Investors and a growing range of other organizations are paying close attention to ESG ratings whether as a screening tool or as a deciding factor in making investment decisions and risk assessments.

Once a company is committed to engaging with specific ESG ratings providers, it is vital that the business identifies internal ownership of the engagement process, organizes internal stakeholders and manages the compilation of data and disclosure, including a clear and consistent process for approval by the board and legal counsel for use by internal stakeholders.

Improving ratings requires progression on an ESG maturity curve with incremental milestones that reflect enhanced corporate accountability on core ESG issues and increased transparency that highlights a company’s ESG commitments and accomplishments.     

For more guidance on how best to improve your ESG ratings, please contact humancapital@aon.com.

Appendix A
Tier One of ESG Ratings Providers to Engage

Appendix B
Tier Two of ESG Ratings Providers to Engage


Appendix C
Tier Three of ESG Ratings Providers to Engage

General Disclaimer
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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