ESG rating

What Are ESG Ratings?

An ESG rating is an assessment of the extent to which the organization’s activities comply with the principles of sustainable development in the environmental and social spheres, as well as in the field of management quality (Environmental, Social, and Governance).

Subjects of ESG Ratings

The subjects of ESG ratings can be:

1)     Non-financial organizations (for example, Tullow Oil, York Timber Holdings, MTS, INTER RAO, Smart Batteries)

2)     Financial organization (Belinvestbank, Nigerian Exchange, Reinet Investments, Sberbank, GTLK)

3)     Regions and municipalities

The table below shows Risk Insights ESG ratings assigned to corporate issuers from Australia.

ESG Ratings Components

The main factors of assessment for ESG rating assignment are:

1. Environmental factors – the impact on the environment (atmosphere, water environment, and soil) and plans to reduce the negative impact on it, the environmental policy of the company, and waste management.
2. Social factors – labor protection, industrial safety, wage levels, employee education, staff turnover, interaction with clients, and action plans for optimizing socially significant indicators of the organization’s activities.
3. Governance quality – the company’s development strategy, its business reputation, the efficiency of its management bodies (for example, the board of directors), the operation of the risk management system, the level of transparency of the organization’s activities, and the protection of the rights of its owners.

ESG and Credit Ratings

It should be noted that an ESG rating is not a credit rating. At the same time, both ESG ratings and credit ratings are significant indicators of the company’s activity.

ESG scores, as well as credit ratings, are assigned on a certain rating scale. The higher the point on the rating scale, the better the company meets sustainability criteria.

When assigning an ESG rating, a rating outlook may also be established, which indicates a possible upgrade (positive outlook), downgrade (negative outlook), or maintenance at the same level (stable outlook) over a 12-month horizon, as well as the equal probability of changes or the maintenance of the ESG rating over the coming year (developing outlook).

The rating processes for ESG and credit ratings are similar. First, the organization and the agency discuss the terms of cooperation, and then the agreement on the provision of the rating services is concluded. After this, the agency receives all the necessary documents from the subject of the rating and organizes a rating committee. The ESG rating is assigned based on the results of this.

After that, the company that assigns the rating notifies the rated entity and agrees with it on the ESG rating publication, and then the ESG assessment data becomes public. After this, the agency continues to maintain (that is, with regular revisions) the assigned rating in accordance with the agreement.

The Role of ESG Ratings

The importance of ESG ratings is that they allow for the analysis of the efficiency of an organization’s activity and assess potential risks related to sustainable development. Data on such ratings may also be useful to investors and clients who are most interested in working with companies that comply with ESG criteria when interacting with the environment, customers, and employees.