1) There is not one framework or regulatory body or set of standards used for ESG ratings at this time; although organizations such as the International Sustainability Standards Board (ISSB) are making progress toward consolidating frameworks.
While there are a number of frameworks for reporting on companies’ ESG activities, in our datasets, we provide information primarily from ESGAnalytics.io. They use AI to detect ESG-related signals from thousands of sources on the web and then they assign a score in real-time based on the signals (using sentiment analysis). ESGAnalytics.io does not rely on self-reporting by companies such as in their annual reports, Form 10-k, press releases and so on.
ESG Data Shop datasets, when available, include scores from 3 of the main organizations providing ESG scores: MSCI, S&P Global, and Sustainalytics. Each of these companies use different scoring methods and so it can be difficult to compare a company’s score from MSCI with its score from S&P, for example. However, ESGAnalytics.io provides normalized scores which makes comparisons easier.
2) When searching for companies’ ESG scores, be aware of the methodology for how the scores were devised. For example, are the scores based only on a company’s self-reporting or were they devised and/ or verified by a third-party? Does the rating company focus more on risk or on sustainability when compiling their ratings?
3) It’s important to compare companies with industry or sector peers. Each industry has factors that are considered more “material” to their ratings. For example, measuring pollutants discharged into waterways would be material to most companies in the “Industrials” sector, but probably not for companies in the “Information Technology” sector. ESG Data Shop provides industry datasets based on Global Industry Classification Standards (GIC).
Please see below for highlights on how ESGAnalytics.io, MSCI, S&P Global, and Sustainalytics score companies for ESG.
According to ESGAnalytics.io:
“We quantify ESG information from unstructured text to deliver a third-party perspective on company ESG performance.”
MATERIALITY
ESGAnalytics extracts over a million data points per month and analyzes ESG-relevant signals corresponding to 26 SASB topic areas (“General Issue Categories”). SASB is the Sustainability Accounting Standards Board. Examples of SASB categories/ topics are: energy management, ecological impacts, data security, labor practices, and systemic risk management. The relevance of the category to an ESG score depends on the company’s industry or sector. Please see graphics below from ESGAnalytics.io.
The below screenshot is from sasb.ifrs.org’s materiality finder. This example shows the SASB relevant topics or issues for Exxon’s industry – Oil & Gas Exploration and Production. ESGAnalytics bases their “ESG Company Pulse” on signals that it picks up based on the relevant issues.
According to MSCI.com:
“MSCI ESG ratings are designed for one purpose: to measure a company’s resilience to financially material, societal, and governance risks…They are not a general measure of corporate ‘goodness,’ a barometer on any single issue or a synonym for sustainable investing.”
MATERIALITY
MSCI assesses thousands of data points across 35 ESG Key Issues.
The Key Issues are weighted according to impact and time horizon of the risk or opportunity.
Please see graphic below from msci.com:
RATING RANGE
MSCI, like many ESG ratings providers, rates companies according to their industry peers and not across different industries.
Please see graphic below from MSCI.com for the range of ratings available for companies:
According to spglobal.com:
“The S&P Global ESG Score is a relative score measuring a company’s performance on and management of ESG risks, opportunities, and impacts compared to their peers within the same industry classification.”
The data for S&P Global ESG scores comes from “a combination of company disclosures, media and stakeholder analysis, modelling approaches, and in-depth company engagement via the S&P Global Corporate Sustainability Assessment (CSA).”
MATERIALITY
S&P Global assesses up to 1,000 data points per company.
An issue/ topic is considered to be material or relevant if it “presents a significant impact on society or the environment [as well as] a significant impact on a company’s value drivers, competitive position, and long-term shareholder value creation.”
See graphic below from spglobal.com:
RATING RANGE
Companies can earn a score on a scale between 0-100.
100 is the maximum score possible.
From Sustainalytics.com:
“Sustainalytics’ ESG Risk Ratings measure a company’s exposure to industry-specific material ESG risks and how well a company is managing those risks.”
There is a “two-dimensional approach”:
– exposure dimension measures a company’s exposure to ESG risks
– management dimension assesses a company’s handling of ESG risks
MATERIALITY
Sustainalytics begins by looking at risk exposure to each of what they consider to be a material ESG issue, at the subindustry level. Then, they consider what risks they consider manageable vs. unmanageable as well as a “management gap” score based on management shortcomings.
See graphic below from Sustainalytics.com:
RATING RANGE
Ratings range from 0-40+, but be aware that higher scores mean more risk (lower scores are “better”).
Sustainalytics uses 5 categories of risk (“Negligible,” “Low,” “Medium,” “High,” “Severe”) that could affect companies’ values.
Please see graphic below from Sustainalytics.com:
