A new report by ERM's Sustain Ability Institute reveals a double-edged sword for ESG ratings. While demand for these ratings is surging, both companies and investors are raising concerns about data accuracy and overall quality.
The survey found that more than half of the companies surveyed use ratings from at least six different ESG rating providers. CDP emerged as the favourite for usefulness among corporate respondents, while both investors and companies agreed that ISS-ESG leads in quality. Other notable names frequently cited for quality and usefulness include Sustainalytics, MSCI, EcoVadis, and Bloomberg.
Investor demand is the primary driver behind the surge in ESG ratings usage. The report highlights a growing trend of integrating ESG ratings and data into investment strategies, with 57 percent of companies citing investor demand as their top motivation. This number has nearly quadrupled since 2018/19, showcasing the increasing importance of ESG factors in investment decisions.
However, despite the rising demand, trust in the accuracy of ESG ratings remains moderate. Over a quarter of surveyed companies have low to very low trust, and only half have moderate trust. The report also found a decline in overall corporate perception of ESG rater quality and usefulness compared to 2018/19. Investors, while demonstrating higher trust levels, are also taking matters into their own hands. The survey reveals a notable trend for investors to develop in-house ESG indicators, metrics, and ratings, reflecting their efforts to build their own expertise in this area.
A key concern for companies and investors is the lack of consistency and comparability between rating methodologies. The report emphasises the need for improved quality and transparency in how ESG ratings are calculated.
ERM's report arrives at a time of significant change in sustainable investing. ESG funds are experiencing rapid growth, and companies are facing intense scrutiny regarding their ESG performance. Regulatory pressure is also mounting, with regions like the E.U. and the U.S. finalising stricter ESG disclosure requirements.
Tom Reichert, ERM Group CEO, acknowledges the crucial role of ESG ratings in driving sustainability efforts and ensuring recognition and financing for high-performing companies. However, he emphasises the need for the industry to address current concerns:
The report concludes with a call to action for collaboration in shaping a sustainable investment environment that meets the needs of companies, investors, and ESG rating providers alike.
