ESG Ratings – What do they mean?

ESG ratings help investors identify the environmental, social, and governance risks and opportunities present within an organization. As companies publicly report their performance against ESG metrics, rating agencies are capturing this information in an effort to formulate a score of how well a company performs relative to peers. A company’s ESG rating can be a vital tool in knowing its position within the investment community and will increasingly determine the flow of investment capital as more investors are not only seeking returns, but also to align with companies that mirror their values.

Rating agencies all have their own unique formula for compiling a company’s ESG rating. Do you know your current ESG rating? Corporate directors and board members should become familiar with their company’s reported sustainability data and resulting ESG scores. Ongoing communication with rating agencies is key!! This information is important in understanding industry-specific ESG risks and performance relative to peers. It assists the business with assessing how those risks can be mitigated and incorporated into strategy. Corporate directors should inquire of executive management regarding a company’s active engagement with the rating agencies to ensure their ratings accurately reflect the performance of the company. Not managing your ESG rating could be a missed opportunity with controlling how your company is presented to the investment community.