Companies are spending up to half a million dollars annually to obtain sustainability ratings in response to investor requests. Despite this, companies often report dissatisfaction with the results, according to new research.
Publicly-listed companies typically incur annual costs between $220,000 (£179,000) and $480,000 (£391,000) for ratings-related expenses, while their private counterparts can be charged up to $425,000 (£346,000) according to a survey developed by ERM’s SustainAbility Institute.
The rise in demand for environmental, social, and governance (ESG) data, combined with the reliance of smaller investors on external providers to evaluate companies, has propelled the unregulated industry’s rapid growth, prompting regulatory scrutiny.
The ERM report, titled ‘Rate the Raters’, also revealed companies are generally dissatisfied with the accuracy of ratings due to errors found in raters’ analysis of company-supplied data, eroding trust in overall ratings.
Out of the 104 companies surveyed, almost one third expressed “low” to “very low” confidence in the accuracy of ESG ratings in reflecting their ESG performance. However, these companies are compelled to obtain ratings due to investor demand, with 95% of citing this as a reason for engaging with ESG raters, and 57% saying this was the primary reason.
Tom Reichert, ERM Group CEO, said: “We know first-hand how crucial ESG ratings are to spurring action on the sustainability agenda and ensuring the highest performing organisations get the recognition and financing they need.
“However our survey shows that the ESG ratings industry is at a crossroads. How raters respond to the pressures they face will determine what the field looks like in the decade to come.
“It is in everyone’s interests to ensure that ESG ratings are transparent, robust, and trusted. We look forward to sharing this report to stimulate new discussions around how we can work together to shape a sustainable investment environment that meets the needs of companies, investors, and raters.”
Over 50% of companies reported actively working with at least six ratings providers. CDP was ranked as the best in terms of both quality and usefulness by corporate survey respondents, similarly, investors also rated CDP as the top ESG rating provider for usefulness. However, investors perceived ISS-ESG (Institutional Shareholder Services) to be the leader in terms of quality.
Apart from CDP and ISS-ESG, other ESG ratings that were frequently cited by both corporates and investors for their quality and usefulness included Sustainalytics, MSCI, EcoVadis, and Bloomberg.
According to ERM, investors themselves are also spending significant sums of money for ESG data and ratings, with costs ranging from $175,000 (142,000) to $360,000 (£293,000). Despite this, many investors reported having only “moderate confidence” in the accuracy and usefulness of such ratings.
You can read the full report here.
ERM (Environmental Resources Management) is a global sustainability consulting firm that provides environmental, health & safety, risk, and social consulting services. The company was founded in 1971 and has since become a leading provider of sustainable services with over 5,500 employees operating in over 40 countries around the world.
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