8 Best ESG Rating Agencies - Who Gets to Grade?

Want to know where you can rely on ESG ratings to help you improve your ESG investment strategy? These are the best ESG rating agencies to help you invest better.

Knowing where to invest your money is hard.

ESG scores are a great way to make sure that you’re investing in companies with the best environmental, social, and governance practices. But how do you know which ESG rating agency is right for you?

These ESG rating providers have been top-rated by some of the top ESG analysts and investment professionals.

They offer a variety of services from screening stocks, providing research on specific sectors or industries, conducting due diligence reviews, and more.

The best ESG ratings providers are ones that provide a fair and accurate assessment of the environmental, social, and governance (ESG) risks and opportunities associated with an investment or transaction.

ESG scores can be used to identify companies with strong ESG performance relative to their peers.

The ESG ratings providers we will discuss in this blog post take into account the following investment and ESG factors:

Investment risk
Financial strength & stability
Social responsibility
Environmental sustainability

What is an ESG Rating Agency?

The ESG (Environmental, Social, and Governance) Rating Agencies are organizations that examine a company’s environmental, social, and corporate governance policies to determine its sustainability.

Investors should use an ESG rating agency’s report to see how sustainable a firm is, allowing them to better determine which ones to invest in.

Universities, pension funds, social trading funds, and other institutional investors searching for long-term financial stability consider ESG ratings when making investment decisions.

The International Organization for Standardization has announced a new initiative to help businesses measure and improve their sustainability performance, to reduce their carbon footprints. With certain firms doing more harm than good in this area of environmental responsibility, rating agencies must continue to hold them accountable.

An ESG rating agency is usually hired by the company itself to perform an in-depth analysis of its practices, and then help it develop better policies.

ESG ratings providers are also becoming increasingly popular among companies themselves who aim for good publicity (and increased revenue) – something which can be achieved with positive ESG developments and progress.

Why Use an ESG Rating Agency?

Rating agencies and data providers are useful tools that can be used to measure an organization’s positive or negative impact on the environment, society, and/or governance for valuation purposes.

In other words, these three areas of concern provide a framework for analyzing investments as required by securities law, which also includes information on what the issuer does with investor money and how it functions in light of environmental, social, and governance issues.

Different ratings are coming up more often in conversations about investing because institutional investors have begun demanding companies they invest in and provide ESG scores before they commit capital.

These rating providers generally address the company’s practices in 7 key areas (but not limited to these):

extractive industries or energy production;
materials management;
human rights or working conditions;
community relations or indigenous peoples’ rights;
customer relations or consumers’ rights;
product responsibility or hazardous substances and waste management;
the company’s governance, which is usually about transparency.

Ratings can be used by investors to analyze their portfolios and for businesses seeking information on how they are performing in terms of their sustainability practices. These scores can be used to offer clarity as well as set a baseline for measuring performance.

Different ratings for ESG can be used to help you determine if an investment is socially responsible or not, and which ESG factors are being considered by the company when it comes to the impact on society and the environment.

The emergence of Artificial Intelligence (AI) in Research

Mosaic, an artificial intelligence consultancy, conducted a study that revealed that companies are increasingly adopting machine learning to find new insights into their customers.

Traditional rating agencies have also started using cutting-edge technologies such as AI-driven businesses to get a better handle on the market.

AI-based services, on the other hand, will frequently provide a different answer to concerns more typically associated with traditional rating agencies such as regular updating and coverage of the firm.

However, their method has disadvantages including opacity over the data’s validity used in the evaluation.

The Deficiency of ESG scores

The lack of regulatory oversight in the United States has allowed thousands of rating platforms to use corporate statements to generate their ESG ratings.

Every agency employs its analysts and algorithms to evaluate ESG metrics in the form of disclosures.

The company intended to publish information on corporate climate risk management, board diversity, and other ESG issues, according to a recent SEC study. This practice has led to some rating agencies focusing on the quantity of information rather than quality.

In Europe, regulatory oversight is increasing, so ESG ratings will become more reliable and useful over time. Scores are also developed for firms listed only outside of the United States, making them somewhat useless to US investors wanting to evaluate corporate responsibility.

The Senate has already passed a comprehensive bill that would require all firms to disclose their ESG standards quarterly and annually. A new disclosure procedure is being considered, giving shareholders a better opportunity to learn the information they can’t disclose in an audited report and avoiding audit failures.

There are the following: The Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), Institutional Shareholder Services (ISS), and the Task Force on Climate-related Financial Disclosures (TCFS).

Harvard Business School is developing an “impact weighted accounting” method, and the European Union is seeking to standardize ESG policies.

The 8 Best ESG Rating Agencies

Sustainalytics ESG Risk Ratings

Sustainalytics is an ESG rating and data supplier that provides ESG ratings on 20,000 companies and 172 countries. They rate 40,000 companies worldwide. Sustainalytics is a subsidiary of Morningstar, one of the largest stock market data providers in the world.

The ESG ratings from Sustainalytics measure environmental, social and corporate governance performance of companies on a global scale. They cover about 13,000 international equities across all regions worldwide.

ESG ratings are based on both quantitative ESG data and qualitative analysis. ESG Scores cover several different areas including governance, environmental impact, social contribution, and financial performance to provide a holistic view of the ESG profile of companies.

The level of consistency with the information provided by Sustainalytics makes this one of the top firms in reporting and data for ESG.

MSCI ESG Ratings

MSCI ESG Ratings are created by MSCI ESG Research, one of the largest rating agencies. These ESG ratings are released for 14,000 different equity and fixed income issuers.

MSCI ESG Ratings are generally known to be one of the industry leaders in publishing scores and ratings for ESG companies.

Bloomberg ESG Disclosures Scores

Bloomberg ESG Disclosure Scores is an ESG data system that provides ESG information for over 11,800 companies in more than 100 countries.

Their ESG data includes topics such as climate change, human capital, and shareholders’ rights. The ESG Disclosure Scores rank companies on their level of ESG disclosure and span key sustainability topics.

ESG Disclosure Scores rate companies on their ESG disclosure and span key sustainability topics, including climate change, human capital, and shareholders’ rights.

FTSE Russell’s ESG Ratings

The ESG Ratings by FTSE Russel are an ESG based assessment system of a company’s ESG performance. The ESG Ratings consist of more than 7,200 securities from 47 countries and are based on a methodical analysis of the performance on a company level.

The ratings are a way to compare and analyze the ESG performance of issuers. The ratings consist of six ESG categories which are listed below:

Corporate Governance
Environmental Policy
Social Policy
Labor Practices
Supply Chain Policy
Country of Origin (a proxy for economic development)

The ratings focus on companies that are listed in the FTSE Global Equity Index Series and other large, liquid stocks.

Therefore ESG ratings give a better insight into mid to large-cap issuers as opposed to small-cap or micro-cap securities.

Institutional Shareholder Services Ratings and Rankings

ISS (Institutional Shareholder Services), majority-owned by Deutsche Bourse Group, provides company, country, and fund ratings as well as data and analysis across the full range of sustainable investment issues, including climate change, human rights, labor standards, corruption, and controversial weapons.

ISS ESG ratings can also help investors in determining compliance with ESGs and proactively address ESGs risks faced by companies.

These risks and rankings are available for companies across various geographies and industries, with ESGs being assessed based on company-specific key performance indicators (KPIs).

These KPIs include climate change, human rights risk assessment, pollution prevention & reduction as well as supply chain management.

S&P Global ESG Scores

Standard & Poor’s Global is one of the largest companies that provide data analytics and reporting related to companies around the world.

A lot of ESG scorecards take a top-down approach, following the idea that ESG scores should be decided by a higher entity.

S&P Global ESG Scores is different from other ESG scoring systems because it uses a bottom-up approach. The system’s goal is to take the ESGY Scorecard directly to the industry level, which can control their ESG behavior.

S&P Global ESG Scores takes a more analytical look at how well companies perform in areas such as environmental practices and employee relations.

Their reporting allows investors and consumers alike to better understand ESG risks and opportunities. The scores can help provide more information on a company’s ESGY score, such as how well it works to minimize ESGY risks.

The ESG scores for over 11,500 companies are calculated based on company answers to S&P’s ESG questionnaire and/or publicly available data. This ESG questionnaire has over 450 questions.

The scores are assigned at the sector level, and ESG ratings for each company can be found on S&P’s ESG webpage.

CDP Climate, Water and Forest Scores

A not-for-profit organization called CDP, which provides environmental data, research, and tools to investors, helps investors identify funds that invest in companies that are more successful at addressing material concerns linked to climate change, water security, and deforestation.

Climetrics rates almost 20,000 funds and the ratings are available publicly for free.

The CDP ESG Rating is a unique rating that identifies the best ESG-integrated investment funds, based on their ESG performance.

It includes all types of fund products (i.e., mutual funds, ETFs, and separate account portfolios) and can be used by investors to identify the ESG best-in-class funds in their portfolios.

Moody’s ESG Solutions Group

Moody’s ESG Solutions Group, a Moody’s Corp. business unit. Moody’s is well-known as being one of the largest credit rating agencies in the world.

This segment of their business offers ESG ratings, analytics, sustainability ratings, and sustainable finance reviewer/certifier services using data from Moody’s.

The group now includes environmental social responsibility (ESG) assessor V.E (Vigeo Eiris), as well as climate data business Four Twenty Seven, which was acquired in 2019.

Ratings from Moody’s are designed for investors who want ESG-related information on companies across all industries, countries, or regions in the world based on more than 13,000 ESG assessments.

See Related: Best Climate Change Stocks

Final Thoughts

The importance of ESG ratings among investors is growing rapidly. ESG data and ratings are increasingly integrated into investment decisions, including credit ratings.

For some companies, there can be only one option but improvements: reporting. Sometimes investors develop a contradictory or “momentum” approach to ESG investing by targeting companies with low or average ratings and engaging with them to increase performance and generate alpha.

Active engagement with the most relevant rating providers can enable companies to identify improvements necessary to obtain high ESG ratings and how to best achieve these.

FAQ

Who is the best ESG data provider?

The top ESG ratings agencies and data providers include Sustainalytics, MSCI ESG Research, and ESGI.

The best ESG ratings agencies share their ratings freely to provide transparency into the data they use so that companies can improve their ESG practices over time.

This is good for both investors looking at ESG investing opportunities as well as corporations who are trying to adjust their current efforts in ESG. ESGI is best for ESG data and reports on companies in emerging markets, while MSCI ESG Research provides the most detailed analysis of current ESG information that can then be used to create rankings or specific investment strategies with their clients.

Sustainalytics focuses more on ESG ratings rather than providing a lot of detailed ESG data on companies, but they do provide some ESG reports and a sector-specific ESG ratings report.

What is the best ESG rating agency?

Sustainalytics, MSCI ESGI, and ESGI are all top rating agencies for ESG that offer access to their information to allow investors more transparency and to help companies improve their ESG practices.

Where can I find ESG ratings?

ESG ratings agencies are third-party companies that evaluate ESG risks to determine which investments or instruments are most sustainable. ESG ratings can be found by using Sustainalytics, MSCI, and Yahoo! Finance.

Are ESG ratings agencies regulated?

ESG ratings agencies are regulated to varying degrees by international, regional, and national rules and requirements. Currently, in the United States, rating agencies providing ESG scores are not regulated by the SEC.

How many ESG data providers are there?

ESG has recently become a buzzword and is now a staple of investing leading to several data providers for this type of research. There are more than 140 different ESG data providers that provide data research in a variety of forms. Some of the most well-known data providers include MSCI ESG Research, S&P ESG Research, Ergon Associates ESW, GMO ESGI, and Maplecroft.