Are ESG ratings coming to an end?
The SustainAbility Institute by ERM released their Rate the Raters 2023: ESG Ratings at a Crossroads report after surveying 104 corporate sustainability experts and 33 investors end of 2022.
This survey provides an overview of the perception and usage of ESG ratings by both investors and corporates as well as market trends and pain points to work towards an improvement of the industry.
The decade to come will be crucial, as responsible investing is at a crossroads and ESG ratings as we know them may not exist a few years from now:
- Overall, ESG ratings are perceived as messy and opaque, bringing confusion and discontent from all their users, showing they need to evolve if they are to keep the key role they have today.
- ESG raters with an active approach and a strong company engagement strategy are perceived as delivering higher quality and usefulness to both investors and corporates.
- While the topic is growing increasingly complex, ESG ratings are becoming more important for corporates and investors alike in a wide range of area including risk an performance assessment, decision-making, reporting, compliance and communication.
- 69% of investors use ESG ratings more than once a week, and 94% of them at least once a month.
- 43% of investors rank requirement to integrate ESG ratings as one of their top 3 reasons to engage with ESG raters, almost 4 times as much as in the 2018/19 period.
- The primary incentive for corporates to engage with ESG raters is investor demand, as 57% of them cite it as their main reason to do so and 82% one of their top three reasons.
- More than half of the surveyed companies engage with at least 6 rating providers, even though they tend to prefer engaging with fewer of them for higher quality outputs.
This survey shows two main trends that are likely to clash if the ESG rating industry does not evolve quickly. The usage of ESG ratings spreads at a fast pace, but the market confidence that they actually reflect sustainability performance remains too low to support the role they are given by most market actors.