ABCs of ESG Ratings/Reporting

Curious about the difference between SASB and SustainalyticsFTSE4Good and the Global 100CDP and DJSIISS and MSCI? Below are short abstracts of each, organized as follows:

  • ESG Reporting Frameworks: CDP, GRI, IIRC, SASB, TCFD
  • ESG Ratings and Rankings:
    • Primarily for Investors: Bloomberg, DJSI, FTSE, ISS, Moodys (VigeoEiris), Morningstar, MSCI, S&P Global (Trucost), Sustainalytics, and Thomson Reuters
    • Primarily for Customers: EcoVadis
    • Primarily for the Public: Corporate Knights Global 100, Just Capital

ESG Reporting Frameworks

CDP: Launched in 2002 as the Carbon Disclosure Project, CDP is a not-for-profit charity based in the U.K. CDP runs a global disclosure system for investors and companies (also cities, states, regions). Companies submit information to CDP by filling out the CDP Questionnaire – on one or more of several platforms: CDP Climate; CDP Water; CDP Supply Chain; and CDP Forests.

  • Customer Usage: Widely used.
  • ESG Ratings Linkages: Feeds into DJSI questionnaire; CDP Climate Score feeds into EcoVadis Scorecard and is posted on the Bloomberg terminal.
  • Industry Focus: Generic set of standards that apply to all industry sectors.
  • Level of Detail: Considerable detail – within limited scope (see below).
  • Limitations: CDP is predominantly focused on the “E” in ESG.
  • Scope: Scope is limited – growing out of the initial sole focus on carbon/GHG. Even with additions to the CDP scope (e.g., supply chain, forests, water), the scope remains narrowly focused on Environment.
  • Transparency: Fully transparent methodology and criteria.

GRI: Formally launched in 1999 (after 18 months of development), the Global Reporting Initiative (GRI) was the first global corporate sustainability reporting framework.

  • Customer Usage: Widely used; since 1999, GRI has become a ‘threshold’ expectation for basic corporate sustainability reporting.
  • ESG Ratings Linkages: None known.
  • Industry Focus: Generic set of standards that apply to all industry sectors.
  • Level of Detail: Considerable; GRI provides extensive detail on each of its disclosure criteria.
  • Limitations: The words material and materiality are considered by GRI to be far broader than the ‘typical’ definition of materiality used (for example) by SASB. GRI treats materiality as an issue that is important to a key stakeholder – even though that may not be financially material.
  • Scope: ESG; historically very strong and detailed on Environment; later added very strong content on Social. GRI does address Governance topics, with a special emphasis on governance structures and stakeholder engagement.
  • Transparency: Fully transparent methodology and criteria.

IIRC: Formed in 2010, the International Integrated Reporting Council (IIRC) was established as a body to oversee the creation of a globally accepted Integrated Reporting framework. IIRC uses integrated reporting with various groups, organizations, and businesses to allow them to better communicate progress and value creation to investors.

SASB: Established in 2011, The Sustainability Accounting Standards Board (SASB) provides standards for sustainability information that are designed to be financially material to investors.

  • Customer Usage: Gaining considerable traction – especially since BlackRock CEO Larry Fink has recommended that companies follow SASB for industry-specific ESG disclosures.
  • ESG Ratings Linkages: SASB has a linkage with ISS.
  • Industry Focus: SASB provides industry-specific standards for about 77 industry sectors and sub-sectors.
  • Level of Detail: SASB offers reasonable detail on the specific disclosure topics it addresses.
  • Limitations: Weak on Governance.
  • Scope: Strong on key Environment topics relevant to each industry sector; selected Social topics; limited on Governance.
  • Transparency: Fully transparent methodology and criteria.

TCFD: Launched in 2015, the Task Force on Climate-related Financial Disclosures (TCFD) is a set of voluntary climate-related financial disclosures designed to be applicable to companies across industry sectors and geographies.

  • Customer Usage: Gaining considerable traction – especially since BlackRock CEO Larry Fink has recommended that companies follow TCFD for climate disclosures.
  • ESG Ratings Linkages: TCFD feeds into the CDP Questionnaire.
  • Industry Focus: Generic set of standards that apply to all industry sectors.  Supplemental guidance is provided for the financial sector and non-financial sectors.
  • Level of Detail: Limited; while there is an extensive amount of documentation about TCFD, the actual level of detail regarding specific disclosure criteria is limited.
  • Limitations: TCFD offers a high-level framework; as such, the disclosure recommendations (for the most part) are quite general.
  • Scope: The TCFD disclosures are organized in four broad sections (which incidentally align almost perfectly with ESG Navigator): Governance, Strategy, Risk, and Metrics. As such, TCFD is more of a “top-down” structure – in contrast with CDP (for example) that started with carbon reporting and expanded from there.
  • Transparency: Fully transparent methodology and criteria.

ESG Ratings and Rankings: Primarily For Investors

Bloomberg ESG Data Service: In 2009, Bloomberg launched Bloomberg ESG Data Service which provides ESG data primarily through the Bloomberg Terminal®, displaying it alongside fundamental financial data. Users access ESG data on the ESG dashboard of the terminal.

  • Acquisitions:
    • 2009:  Bloomberg acquired New Energy Finance and subsequently launched Bloomberg ESG Data Service.
  • Company Involvement:
    • This is primarily a data service; companies access ESG data via the Bloomberg terminal.
    • The Bloomberg ESG Dashboard provides key ratios and performance indicators – primarily so users can compare ESG and financial performance across companies.
  • Methodology: Analysis of public information disclosed by companies in reports, websites, etc., as well as through direct company contact.
    • Criteria: Bloomberg ESG Disclosure Ratings are based on ~120 ESG indicators.
    • Output: ESG data is accessed on the Bloomberg terminal, contains:
      • Bloomberg ESG Scores
      • Scores from third-party rating agencies: CDP Climate Disclosure Score; ISS Quality Score; RobecoSAM; and Sustainalytics Rank.
  • Rating Scale: Out of 100 (plus the third-party ratings)
  • Target Market: Mid Cap (> $2 billion) to Large Cap (> $10 billion)
  • Updated: ESG Disclosure Scores rate companies annually.
  • Usage: Over 12,000 ESG customers in 2016

DJSI: Launched in 1999, the Dow Jones Sustainability Indices (DJSI) launched in 1999, are a family of indices evaluating the sustainability performance of thousands of companies trading publicly, operated under a strategic partnership between S&P Dow Jones Indices and RobecoSAM (Sustainable Asset Management).

  • Company Involvement: Companies complete questionnaire; receive a Company DJSI Report.
  • Methodology:
    •  Criteria: RobecoSAM Corporate Sustainability Assessment (Questionnaire): Industry-specific questionnaires
    • Output:
      • Company DJSI Report
      • DJSI World: Index represents the top 10% of the largest 2,500 companies across 60 industries in the S&P Global Broad Market Index (BMI).
      •  DJSI North America: Index represents the top 20% of the largest 600 North American companies in the S&P Global BMI.
  • Rating Scale: Out of 100
  • Target Market: Small Cap (< $2 billion) to Large Cap (> $10 billion)
  • Transparency: Considered to be very limited.
  • Updated: Annually. Questionnaires are typically sent to participants in April, with results released in September.
  • Usage: Over 12,000 ESG customers in 2016.

FTSE Russell’s ESG Ratings: FTSE Group, a wholly owned subsidiary of the London Stock Exchange launched in 1995, originated as a joint venture between the Financial Times and the London Stock Exchange. FTSE Russell is the trading name of London Stock Exchange Group subsidiaries: FTSE Group and Frank Russell Company. FTSE4Good Index: Launched in 2001, FTSE4Good is a series of ethical investment stock market indices launched by the FTSE Group.

  • Acquisitions:
    • 2009: LSEG acquires majority stake in Turquoise
    • 2013: LSEG acquires majority stake in LCH Group
    • 2014: LSEG acquires Frank Russell Company
    • 2015: FTSE and Russell Indexes join to create FTSE Russell
    • 2017: LSEG acquires Mergent, The Yield Book and Citi Fixed Income Indices
    • 2019: LSEG acquires Beyond Ratings and a 5.2% stake in Euroclear
      • August 2019: LSEG proposed an all-share acquisition of Refinitiv
    • 2020: Acquisition of Refinitiv due to close July-December 2020
  • Company Involvement: Companies complete questionnaire and are given a rating that is then shared with investors.
  • Methodology:
    • Criteria: 3 layers come together to produce an ESG rating; 300+ indicators, 14 ESG themes scoring, 3 ESG pillars:
      • Governance: Disclosure of all material ESG impacts and relationship to KBD’s, board oversight, long-term and short-term company goals, climate change policies, commitments, initiatives, and support
      • Environment: Disclosure of emission footprint and efforts to reduce (Scope 1,2 and 3), material and water sourced, management of risk and opportunities
      • Social: human rights; labor, diversity, health, and safety; product safety and quality; community relationships
    • Output: ESG rating based on a score; FTSE also produces a company report describing the basis for the company score.
  • Rating Scale: 0-5, with 5 being the highest.
  • Updated: Last updated: 2019/2020.
  • Usage: 350+ institutions globally.

ISS: Institutional Shareholder Services Inc. (ISS) is the largest proxy advisory firm, providing investment and governance solutions to the financial community. Fund managers pay ISS to advise (and often vote their shares) regarding shareholder votes. 

  • Acquisitions:
    • ISS was owned by MSCI until April, 2014 when it was purchased by Vestar Capital Partners.
    • 2015: ISS acquired Ethix SRI Advisors.
    • 2017: Ownership of ISS switched to Genstar Capital.
    • 2017: ISS acquired IW Financial and South Pole Climate Data.
    • 2018: ISS acquired Oekom Research AG, a leader in providing ESG ratings and data, as well as sustainable investment research.
  • Company Involvement: Companies are invited to review, verify, and provide feedback.
  • Methodology:
    • Criteria:
      • Governance: Analysis of >200 factors that indicates a company’s governance risk across categories: board structure; compensation/remuneration; shareholder rights and takeover defenses; and audit and risk oversight.
      • Environmental: management of environmental risks and opportunities; carbon and climate; natural resources; and waste and toxicity
      • Social: human rights; labor, health, and safety; stakeholder and society; and product safety, quality, and brand
    • Output:
      • ISS Governance Quality Score: Governance Quality Score uses a numeric, decile-based score.
      • ISS E&S Disclosure Quality Score: measures and identifies risk in environmental and social areas of concern through thorough analysis of company disclosures.
  • Rating Scale: 1st to 10th decile (1st represents higher quality practices and lower risk).
  • Updated: On an ongoing basis.

Moody’s (Vigeo Eiris): Moody’s was founded in 1909 to produce statistics related to stocks and bonds. Moody’s joined the Task Force on Climate-related Financial Disclosures (TCFD) in 2016 and partnered with Climate Bonds Initiative (CBI) in 2017. Moody’s acquired a majority stake in Vigeo Eiris in 2019.

Vigeo Eiris continues to be headquartered in Paris, operating under its existing brand, and is an affiliate of Moody’s Investors Service. Vigeo Eiris provides data to investors so they can integrate ESG criteria into their investment strategies and differentiate themselves in the marketplace.

  • Acquisitions:
    • 2019: Moody’s acquires a majority stake in Vigeo Eiris
    • 2019: Moody’s also acquires Four Twenty Seven and SynTao Green Finance
  • Company Involvement: (currently researching)
  • Methodology: Uses a framework on 38 sustainability criteria based on international standards. They take into consideration 6 domains of risk factor analysis and weigh them based on relevancy. The criteria and frameworks are further assessed through 330 indicators allowing the evaluation of managerial systems. Vigeo Eiris is able to produce analysis by sector.
  • Usage: (currently researching)

Morningstar: Founded in 1984, Morningstar is a global financial services firm headquartered in Chicago, Illinois, United States. It provides an array of investment research and investment management services.

  • Acquisitions:
    • 2017: Morningstar acquired 40 percent of Sustainalytics, a research and rating firm specialized in ESG insights.
    • 2020: Morningstar announced it had reached an agreement to acquire Sustainalytics.
  • Other: See Sustainalytics for more information

MSCI ESG Research: Launched in 2010, MSCI ESG Research evaluates ESG risks.

  • Acquisitions:
    • 2010: MSCI acquired Risk Metrics (which had acquired Innovest and KLD in 2009).
    • 2014: MSCI acquired GMI Ratings (a 2010 merger of GMI and Corporate Library).
    • 2019: MSCI acquired Carbon Delta, a Zurich-based environmental fintech and data analytics firm specializing in climate change scenario analysis.
  • Company Involvement: Companies are invited to participate in a formal data verification process prior to publication of their MSCI ESG Ratings Report.
  • Methodology:
    • Criteria: Assessment based on 37 key ESG issues. Data collected from government databases, company disclosures, and data from academic and NGO databases.
    • Output: MSCI ESG Ratings Report (provided to companies) provides the basis for the company score.
  • Rating Scale: AAA to CCC
  • Target Market: Small Cap (< $2 billion) to Large Cap (> $10 billion).
  • Transparency: Considered to be very limited.
  • Updated: On an ongoing basis, with company reviews occurring at least annually.
  • Usage: Provide ESG ratings for >7,000 global companies.

S&P Global (Trucost): S&P Global was founded in 1860. In 1999 in collaboration with RobecoSAM, S&P Global launched the Dow Jones Sustainability Index.

Trucost was established in 2000 and has been a subsidiary of S&P Global since 2016. Trucost provides data to investors, companies and policy makers regarding a company’s carbon footprint and impact on the economy.

  • S&P Acquisitions:
    • 2012: S&P Dow Jones Indices is formed
    • 2016: S&P acquires Trucost
    • 2019: acquires RobecoSAM’s ESG business
  • Company Involvement: (currently researching)
  • Trucost Methodology: (currently researching)
  • Trucost Usage: S&P Global provides data on more than 15,000 companies worldwide. Trucost works with about 82 companies.

Sustainalytics: Launched in 2009, Sustainalytics was acquired by Morningstar in April 2020. (Morningstar had purchased 40% of Sustainalytics in 2017; purchased the other 60% in 2020.) Sustainalytics’ ESG Ratings cover ~11,000 companies and supports hundreds of the world’s foremost investors who incorporate ESG and corporate governance insights into their investment processes.

  • Acquisitions:
    • Pre-2009: The predecessor companies to Sustainalytics date back to 1992, when Jantzi Research was launched.
    • 2009: Sustainalytics was born from the merger of DSR, Scoris, and DSS.
    • 2009: Jantzi Research, Canada’s leading ESG research provider, merged with Sustainalytics.
    • 2012: Sustainalytics acquired Responsible Research.
    • 2017: Sustainalytics sold 40% of the firm to Morningstar.
    • 2020: Morningstar purchased the remaining 60% of Sustainalytics.
  • Company Involvement: Companies receive a draft Sustainalytics ESG Rating Report prior to publication, and can provide feedback and additional information.
  • Methodology:
    • Criteria: Industry-specific criteria; typically cover ~70 indicators in each industry. Focus: covers three dimensions: Preparedness; Disclosure; and Performance.
    • Output: Sustainalytics ESG Rating Report
  • Rating Scale: Out of 100; sector/industry-based comparison.
  • Target Market: Small Cap (< $2 billion) to Large Cap (> $10 billion).
  • Transparency: Considered to be moderate.
  • Updated: Annual publication of company reports.
  • Usage: Covers >6,500 companies across 42 sectors.

Refinitiv (See also: Thomson Reuters): Refinitiv is a global provider of market data. Previously known as Thomson Reuters Financial & Risk, the unit was spun off and rebranded as Refinitiv in 2018. Thomson Reuters retained 45% and sold a majority stake (55%) to Blackstone Group.

  • Acquisitions & History:
    • Pre-2018: Known as Thomson Reuters Financial & Risk.
    • 2018: Spun off as a unit of Thomson Reuters and rebranded as Refinitiv; Thomson Reuters retained a 45% stake in Refinitiv.
    • 2019: London Stock Exchange Group agreed to buy Refinitiv in an all share transaction.
    • 2020: Sale of Refinitiv to London Stock Exchange Group is on schedule for the 2nd half of 2020.
  • Company Involvement: Little; methodology is based on public data.
  • Methodology: Analysis of public information disclosed by companies in reports, websites, etc., as well as through direct company contact. Historical analysis is provided dating back to 2002 for ~1,000 companies (mainly U.S. and European).
    • Criteria: Roll-up: from ~400 metrics => 186 data points => 10 ESG Category Scores => 3 Pillar Scores and Pillar Weights => to the Refinitiv ESG Score (that also includes “Controversy” topics).
    • Output: (1) Refinitiv ESG Scores across 3 (E, S, G) Pillars and 10 Themes; and (2) Refinitiv ESG Score which is discounted for ESG controversies.
  • Rating Scale: On a scale of A+ to D- and percentile rank scores.
  • Target Market: Mid Cap (> $2 billion) to Large Cap (> $10 billion)
  • Updated: 
    • Data is updated weekly.
    • Methodology document (available online) dated April 2020.
  • Usage: Provides ESG data and scores on ~9,000 public companies globally.

Thomson Reuters ESG Research Data (See also: Refinitiv):  Since 2003, Thomson Reuters has been active in ESG research and ratings. Until 2013, its primary resource in developing, constructing, and maintaining the ratings was ASSET4, a premier source of ESG data. In 2013, Thomson Reuters developed – which were rebranded as Refinitiv.

  • Acquisitions & History:
    • 2009: Acquired Asset4, a provider of raw ESG data to investors, founded in 2003.
    • 2013: Launched the Thomson Reuters Corporate Responsibility Ratings (folding in the former Asset4 methodology).
    • 2018: Evolved into the Thomson Reuters ESG scores (reduced Social categories from 7 to 4 and Governance categories from 5 to 3).
    • 2018: Spun off its Thomson Reuters ESG unit into Refinitiv; retained a 45% stake and sold 55% to Blackstone Group.
    • 2019-2020: September 2019: London Stock Exchange Group agreed to buy Refinitiv in an all share transaction; expected to close 2nd half of 2020.
    • 2019-2020: Positioned as: Thomson Reuters ESG Research Data (Refinitiv) until such time as the sale of Refinitiv to London Stock Exchange Group is finalized (2nd half, 2020)
  • Methodology: Analysis of public information disclosed by companies in reports, websites, etc., as well as through direct company contact.
    • Criteria 2013-2018: 750+ data points => 250 KPIs => 15 Categories => 3 Pillar Scores. Breakdown of the three pillars into the 15 categories from 2013-2018 was:
      • Environment: emissions reduction, resource reduction, product innovation.
      • Social: community, diversity, employment quality, health and safety, human rights, product responsibility and training and development.
      • Governance: board functions, board structure, compensation policy, shareholders policy, vision and strategy.
  • Other: See Refinitiv above.

ESG Ratings and Rankings: Primarily For Customers

EcoVadis: Founded in 2007, EcoVadis is a paid service designed for corporate procurement teams to assess the ESG performance of their suppliers. Companies that subscribe to one of EcoVadis’ options can evaluate their company’s ESG performance against industry and regional benchmarks.

  • Acquisitions: None known.
  • Company Involvement: Companies provide supporting documents and participate in a customized survey that ranks their organization’s ESG performance. EcoVadis then offers solutions based on the survey assessment results and organization’s industry sector(s).
  • Methodology: Scoring is based on evidence from company, suppliers, stakeholder representatives and 3rd party organizations.
    • Criteria: 21 issues grouped into four themes: Environment, Social, Ethics, and Sustainable Procurement. Each theme is rated on 7 management indicators. Overall score is a weighted average of the four theme scores.
    • Output: Survey results formulate the EcoVadis Scorecard with the CSR Rating.
  • Rating Scale: Themes are each rated on a 0-100 scale; as is the overall rating. Medals (bronze, silver, gold) also may be applicable.
  • Updated: Company scorecards are updated based on company registration.

Usage:  >50,000 rated companies in 150 countries and 190 industries to date; partnered with >450 leading multinational organizations

ESG Ratings and Rankings: Primarily For the Public

Corporate Knights Global 100: Founded in 2002, Corporate Knights (a Canadian company) has (since 2005) published an annual index of the “Global 100 Most Sustainable Corporations in the World.” The timing of this announcement typically coincides with the annual meeting of the World Economic Forum in Davos, Switzerland.

  • Acquisitions: None known.
  • Company Involvement: Companies are invited to participate in a formal data verification process prior to publication.
  • Methodology: Analysis of public information disclosed by companies in reports, websites, etc., as well as through direct company contact.
    • 14 key performance indicators
    • Companies are scored only on those performance indicators deemed relevant to their industry sector.
  • Rating Scale: Out of 100 and also ranked against other companies in the same industry sector.
  • Target Market: Mid Cap (> $2 billion) to Large Cap (> $10 billion).
  • Updated: Annually – in January.

JUST Capital: Founded in 2013, JUST Capital is an independent nonprofit that tracks, analyzes, and engages with large corporations and their investors on how they perform on the public’s priorities. JUST Capital polls Americans annually to identify the issues that matter most in defining just business behavior today. They then define metrics that map to those issues and track and analyze the largest, publicly traded U.S. companies. This analysis powers the JUST Capital Rankings  which serve as a roadmap for companies.

  • Acquisitions: N/A
  • Company Involvement: (currently researching)
  • Methodology: Just Capital focuses on the “People’s Priorities” and prioritizing stakeholders. They gather these priorities by surveying ~4,000 Americans asking what issues are most important to them among ESG. Then they assign each resulting issue to the stakeholder (worker, customer, community, shareholders) that the issue most impacts. Just Capital then determines how each company performs across each issue and stakeholder. All information is shared to the company before being published to promote transparency and fairness.
  • Rating Scale: Ranks companies 1-100 in each category
  • Updated: Yearly
  • Usage: ranks the largest publicly traded companies in the U.S.

 

Sources: Most of the information above came directly from the websites of the various organizations, along with Wikipedia. One particularly helpful source is below.

ESG Reports and Ratings: What They Are, Why They Matter