ESG Ratings: An Overview of Providers and Upcoming Regulations
In recent years, the topic of ESG (Environmental, Social, Governance) has gained significant importance. Companies are increasingly challenged to transparently communicate their sustainability performance and undergo evaluation through ESG ratings. Despite this growing attention, the field of ESG ratings has remained largely unregulated, creating complex challenges for companies.
Importance of ESG Ratings
ESG ratings have become a tool for companies that significantly impact both financing opportunities and their reputation. Investors are increasingly using these ratings to identify economically sustainable and future-proof companies. Furthermore, large corporations demand information from their suppliers on business practices and key metrics to obtain sustainability data for their supply chains, aligning them with their own sustainability strategies.
Given the significance of ESG ratings, it is problematic that the large number of providers and the lack of standards sometimes result in inconsistent outcomes. Additionally, participating in ESG ratings requires considerable resources, both financial and personnel. Another point of criticism is that the focus often lies too much on the ratings themselves rather than on actual sustainability.
Providers and Methods of ESG Ratings
There are hundreds of different ESG rating providers worldwide, with about 30 to 40 agencies operating in the EU. The most well-known and relevant providers for small and medium-sized enterprises, along with their methods, include:
- CDP: CDP focuses on environmental issues and uses detailed questionnaires. Ratings range from A to D-, and while participation is free, fees are charged for publishing results.
- EcoVadis: EcoVadis requires companies to fill out an online questionnaire covering environmental, human rights, ethics, and procurement topics, submitting supporting documents. The questionnaire is tailored to the company's industry and size. Experts evaluate the data, resulting in an overall score and a medal ranging from Platinum to Bronze. This service is fee-based.
- B Corp Certification: This certification is awarded by B Lab, an independent non-profit organization, based on a questionnaire in which companies must score at least 80 out of 200 points, followed by verification. Recertification after three years ensures standards are maintained long-term. The evaluation is fee-based. Unlike other providers, B Corp offers a unified certificate along with information on the achieved score. B Corp is part of GRESB, which describes itself as a global ESG benchmark for financial markets.
- RepRisk: RepRisk claims not to provide ESG ratings but to systematically identify ESG risks. They combine AI and machine learning with human expertise. RepRisk provides various indices, such as a company’s risk exposure.
Planned Regulation of the Rating Market
The EU plans to introduce comprehensive regulations for ESG rating providers to improve transparency and quality in this sector. Key planned measures include a licensing requirement through the European Securities and Markets Authority (ESMA), transparency requirements for methods and models, as well as rules to prevent conflicts of interest. Furthermore, ratings for environmental, social, and governance factors should be reported separately. For smaller providers, easing measures and transition periods are being considered. The new regulations are expected to come into force in the second half of 2024 and take effect 18 months after publication in the Official Journal of the EU, likely in 2026.
These measures aim to increase the comparability and integrity of ESG ratings. Various actors, such as the Institute of Public Auditors in Germany (IDW), are already calling for systematic oversight of ESG rating agencies and more transparency in rating methodologies to minimize greenwashing and build trust in the ratings. Once the regulations are implemented, companies could benefit from a more standardized and transparent system that meets the needs of both investors and businesses.
Conclusion
The large number of providers and the often complex and non-transparent results pose challenges for companies in choosing the right provider and drawing meaningful conclusions from the evaluations. However, many large companies already require specific certifications from their suppliers, simplifying the decision process. The EU’s efforts to regulate ESG ratings raise hope that the significance and reliability of rating results will improve in the future.