Extra-Financial Rating

Extra financial ratings consist assessing the Environmental, Social and Governance (ESG) performance of a company or country and to award a final rating with which the ESG practices of different issuers can be compared. This rating is used especially by asset managers to manage RI funds. Over the last 20 years, specialized research agencies have been created that offer specific extra-financial research data for investors. In the last years, interest in and analysis of the financial impact of climate change has grown. New forms of ratings have emerged recently, particularly CO2 emission ratings which show the carbon footprint of issuers. Recently, there has been a consolidation of the market: first, in 2014 MSCI ESG Research acquired GMI Research. In 2015, Ethix SRI Advisors, a Swedish research agency, was taken over by the ISS (International Shareholder Service). The same year EIRIS and Vigeo announced their fusion. Moreover, traditional data providers like ThomsonReuters are offering their own data or are partnering with specialized research agencies. For example, Bloomberg partnered with Sustainalytics in 2014. Furthermore, traditional ESG research providers are cooperating with specialized agencies, for instance oekom Research and South Pole Group.Finally an increasing number of specialist financial service companies have developed offers on ESG at company or fund level – Morningstar, MSCI, BNP Paribas securities services moving ESG data from niche to mainstream market. 

ESG ASSESSMENT OF COMPANIES

ESG ASSESSMENT OF COMPANIES

Research agencies assess and rate the environmental, social and governance practices (ESG) of companies. Most of them were founded in the 2000s. Research agencies provide an exhaustive screening and evaluation of the extent of involvement of companies in controversial activities that may cause ESG risks. These research agencies have emerged throughout the world and carry out their assessments on the basis of corporate reports and various sources: from the company itself (public documents, questionnaires and meetings), from stakeholders (NGO, unions, governmental organizations, etc.) and from the media. Each agency has developed its own methodology as there is no common standard of a sustainable development. 

OVERVIEW OF ESG RATING AGENCIES

OVERVIEW OF ESG RATING AGENCIES

The major research providers in Europe providing full ESG ratings are EIRIS-vigeo (United-Kingdom/France), MSCI ESG reseach (USA), oekom (Germany), Sustainalytics (Netherlands) Inrate (Switzerland) or EthiFinance (France). Furthermore, there are research agencies that focus on specific environmental, social or governance topics: Trucost and the South Pole group are offering detailed carbon data of companies. ISS (Institutional Shareholder Services)-ethix, MSCI-GMI research or Proxinvest have a focus on governance issues (board remuneration, minority shareholder rights, etc.). Additionally, specialized agencies like Global Engagement Services (GES) or Hermes EOS engage with companies on behalf of their investor clients. ESG considerations play an increasingly important role in the assessment models of traditional financial rating providers. Some brokers have integrated ESG data in their equity research reports as the latest. IRRI (Independent Research on Responsible Investment) study revealed. On the credit side, leading credit rating agencies, among them Standard and Poor’s and Moody’s, announced in May 2016 to take ESG parameter in their credit assessment into account.  

ESG ASSESSMENT OF COUNTRIES

ESG ASSESSMENT OF COUNTRIES

For several years, the majority of these agencies have developed an ESG-rating methodology for countries. This enables asset managers to put in place RI sovereign funds.

EXTRA-FINANCIAL RESEARCH RE-ASSESSED

EXTRA FINANCIAL RESEARCH RE-ASSESSED

The majority of banks and asset managers offering RI have established their own RI research teams. These teams provide fund managers their own expertise on the environmental, social and governance aspects of issuers. This expertise helps fund managers to react better on research needs of clients. Additionally, many investors do not base their own ratings only on the ratings of own research agency but on several agencies or studies of brokers in order to complete their own analysis.