ESG stands for "Environment, Social Impact and Governance", which has become a standard for ethical operations in the view of global investors. ESG deserves more attention from Asian supply chain companies. To give our readers a more in-depth and comprehensive knowledge about ESG from the investor's perspective, DIGITIMES has invited QIC as a contributing partner to share their insights in a 5-part series: 1) Should companies invest in ESG? 2)Third-party ESG reporting 3)ESG metrics matter 4)A Resource Guide for Staying Up To Date on the Recent Trend Towards Global Unification of ESG Reporting Standards and 5) Getting Ready for Climate-related Financial Disclosures. The article is the second part of the QIC ESG Series, which was originally published on QIC website.
In the last few years, there has been a proliferation of ESG-related research targeted at investors to help them incorporate ESG (Environmental, Social, and Governance) risks and opportunities into their investment decision-making. Some of these firms have been around for a long time but have increased their offerings along with rising demand, while others are trying to infiltrate an already expanding market with niche services.
Most companies are familiar with their Corporate Governance Evaluation score, administered by the Stock Exchange, and aim to get ranked in the top percentiles. This evaluation is an excellent tool for a firm to improve disclosure, policies and transparency but if companies focus on ticking the box to get a high score rather than examining the overall governance culture of the firm they may be missing out on effective ways to add value. From the viewpoint of a global institutional investor, this may be a good starting point to understand the governance structure of a firm but they often look to other ESG-research providers with global coverage to offer industry-specific analysis to enhance their own internal research.
If you are part of the IR team at a larger company, in terms of market capitalization, you may become overwhelmed with the number of questionnaires and surveys that you receive from multiple ESG rating agencies, and struggle with how to prioritize the responses. From an investor's perspective, the most commonly cited ESG research used are from MSCI ESG and Sustainalytics. Knowing if you are covered by these companies and understanding the data that makes up your score is important for communications with investors as well as in helping to lead improvements in your company's sustainability strategy. On the other hand, some smaller-cap companies are not even aware that is being scored by these firms and may have missed opportunities to correct data or communicate key ESG issues.
MSCI ESG
MSCI ESG ratings currently cover over 7,500 companies, using a rules-based methodology to identify leaders and laggards in various industries. MSCI ESG provides a score for the company based on 37 indicators on a scale with the highest score of AAA to CCC at the bottom. The score is based on the company's exposure to ESG risks and how well they manage those risks compared with peers. To gather the data MSCI ESG states that they use a combination of technology and AI along with a team of over 200 ESG analysts. They currently provide research to over 1400 investors globally.
Last year MSCI ESG began making the scores of companies public—you can check for your score and the ratings of your peers on their website here.
Sustainalytics
Sustainalytics' ESG Risk Ratings covers 11,000 companies and uses 40 industry-specific indicators to examine a company's risks, with a focus on the most material ESG risks to the company's performance. Sustainalytics' reports look at exposure to risks by industry and company and then how well the company is doing to mitigate those risks. For the risks that are manageable, Sustainalytics analysts will look to the company's policies, programs and quantitative data available. With Sustainalytics, the lower the score the better—indicating that the firm is lower risk.
Although these are just two of the ESG providers most commonly referenced by investors, that does not mean that you should completely neglect to respond to other service providers as some may be used by your major shareholders or customers, while others may influence your listings in ESG-related indices. There are also many other platforms that investors may use for the underlying data to incorporate it into their own proprietary ESG analysis such as CDP, Bloomberg, and Thomson Reuters.
Regardless of whether your company is covered by ESG rating agencies or not, the best way to communicate with investors is proactively by providing clear, easy-to-access data that explains and supports your company's long-term sustainability strategy. Publishing data and discussion related to your company's material issues is very important for investors to assess how well your firm is prepared for longer-term risks and ensure that policies and practices are instilled throughout the firm.
Although ESG ratings are useful they are often just a starting point for many investors to reference potential risks relative to peers. Ideally, investors prefer to get the information directly from the source through direct engagement with the company, so it is important that the company's IR team is able to articulate clearly the company's material issues and how that impacts the long-term business strategy.
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