How do you find out what a company’s ESG rating is?
December 18, 2021
5 minutes to read
As sustainability issues become of increasing importance to more and more investors, it is also important that they can be measured. In simple terms, a company’s ESG rating is a numerical indicator of how well the company performs in Environmental, Social and Governance terms.
With a growing need to quantify the ESG performance of listed companies, a number of rating systems have emerged. You can compare the work of these ESG data providers to what Standard & Poor’s, Fitch Ratings and Moody’s do. But while these rating agencies assess the creditworthiness of companies and countries, ESG data providers put a number on how companies score in the area of sustainability. Another difference is that they work independently, whereas credit rating agencies are paid by the companies they assess.
Useful to know: an ESG score is calculated based on hundreds of data streams, news channels and events that are reported and interpreted. So there is always a gap between reality and perception. After all, not all information is public or complete.
Professional versus private investors
If you invest in funds or trackers that promote themselves as being ESG or sustainable products, the managers will do the ESG homework for you. These pros typically have access to detailed (and paid) ESG datasets from, for example, S&P Trucost, Bloomberg or ISS-ESG. They often combine all these datasets with their own in-house ESG analyses to arrive at their investment decisions.
If you invest in individual shares, you not only have to do the ESG homework yourself, but the number of sources is also much more limited. Fortunately, more and more ESG data providers are making (some of) their data public. As a private investor, you can make well-informed decisions without having to open an account or paying for access to a very expensive portal.
Some commonly used platforms:
Their public search function for ESG ratings and climate impact allows you to browse the more than 2,900 companies that make up the MSCI ACWI Index. You can search by company name or ticker and see how the company compares to competitors and its sector. Companies are rated between CCC (worst rating) and AAA (best rating).
This ESG data provider was acquired by Morningstar in 2020. In their database you will find data for more than 14,600 listed companies. There are five categories into which stocks are classified: negligible ESG risk (0-10), low (10-20), medium (20-30), high (30-40) and severe (40+). You can also see how a company scores compared to its peers in that sector.
3. Arabesque S-Ray
Arabesque S-Ray is a provider focused on consulting and data solutions, by combining big data and ESG parameters to assess the performance and sustainability of more than 8,400 companies. There are several ways to evaluate listed companies:
- The GC rating, an assessment based on the core principles of (from 15 to 75).
- The ESG rating (score from 15 to 80)
- The Temperature rating, which quantifies the extent to which companies impact climate warming.
Refinitiv is one of the world’s largest data providers. ESG ratings for more than 10,000 companies have been freely available since 2021. For each company you will find an overall rating, a rating per area (E, S and G) and a score per category within each area. The worst score is 0, the best score is 100.
Same company, different opinions
As you probably already figured out, each ESG data provider bases itself on its own set of definitions, calculation methods and data sources. There is therefore no single, universal ESG score. We can all agree that one metre consists of exactly one hundred centimetres. However, opinions differ about the ESG score of, say, ArcelorMittal:
- MSCI: BB rating on a scale from AAA to CCC.
- Sustainalytics: a rating of 37 on a scale of 0 to 40+. The higher the figure, the greater the ESG risk.
- Arabesque S-ray: a rating of 50197 out of 80. The higher it is, the worse it is.
- Refinitiv: a rating of 85 out of 100, where 100 is the best.
So they are all comparing "apples to apples", but each doing it in their own way. As can be seen from the above example, a company can therefore be bottom of the class for one, a middle grade student for another and the teacher's pet for a third.
If you are looking at a company’s ESG rating with a data provider, it’s a good idea not to get too fixated on it. ESG data providers try to uncover the truth, each in their own way, but nobody is perfect. The best advice is to check with different providers and keep a critical mindset.