Why Sustainability Ratings Matter
Sustainability ratings can capture value that financial reporting systems overlook.
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Leading Sustainable Organizations
“The growing body of research linking strong sustainability performance with strong financial performance only improves the value proposition for sustainable business practices,” writes Allen L. White, a senior fellow at the Tellus Institute and founder of the Global Initiative for Sustainability Ratings.
Were you rated recently? If you used Uber to get to work, stayed in an Airbnb, or opened a new line of credit, the answer is most certainly “yes.” The answer also is “yes” if you happen to work for one of the 50,000 companies annually subject to environmental, social and/or governance (ESG) evaluations by more than 80 research and ratings organizations worldwide.
The convergence of communications technology, big data and globalized markets make ratings a ubiquitous feature of international commerce and an indispensable tool for business-to-business and business-to-consumer exchange. When they are credible, transparent and timely, ratings serve as a powerful efficiency enhancer in a fast-moving global economy.
For companies, rigorous ESG ratings can play a vital role in benchmarking and driving improvement across a wide spectrum of issues: energy efficiency and carbon reduction; occupational health and safety and human rights; board diversity and quality of sustainability strategy. By rating, ranking and indexing issue-specific and multi-issue composite performance, ESG ratings provide a proxy for a company’s external costs and benefits absent from conventional financial accounting and reporting systems.
In so doing, they equip capital providers with critical information to distinguish firms that are superior to their peers in terms of risk management and corporate governance. It also helps in identifying those companies that exhibit management acumen in terms of resiliency in the face of regulatory uncertainty about carbon control, living-wage laws and other ESG factors. Companies that demonstrate ESG leadership can expect to be rewarded with lower-cost capital, an especially attractive advantage for firms that frequently float bonds to finance large factory, infrastructure and equipment purchases.
Companies may be subject to ESG performance evaluations from some 400 products offered by the global corporate ratings industry. This large and diverse range of products reflects both the pace of innovation in the field and the absence of generally accepted standards that are comparable to those governing corporate financial and sustainability reporting. Further contributing to this expansion is the rapid growth of ESG-based investing, now estimated at $21 trillion of ESG assets under management worldwide.