Rating, Performance, Disclosure


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.


RI funds are often invested in shares, bonds, monetary securities. Mostly, issuers (companies or countries) undergo a double selection, a financial and extra-financial one. Issuers are generally companies or countries selected because of their environmental, social and governance (ESG) performance. There is no common RI definition for all investors. However, different overall approaches can be distinguished.


ESG reporting practices are heterogeneous. Different approaches have been developed to tackle this issue.

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

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

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

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.

Financial performance

Do SRI funds perform better than conventional funds? This performance question of RI funds is widely discussed and researched. A recent study by Deutsche Asset and Wealth Management and Hamburg University, published in November 2015 in the Journal of Sustainable Finance Investment, has analyzed the primary and secondary data of previous academic reviews. Findings of more than 2,000 individual studies were taken into account. As a result, approximately 90 % of the studies found a non-negative ESG and corporate financial performance (CFP) relationship. On the contrary, the large majority of studies reported positive findings.

The full paper is available here.

Extra-financial performance

The extra-financial performance of RI is a subject that is rarely decrypted. It attempts to find out whether there are indicators that help measuring SRI funds relative to their social and environmental impact. 

In January 2013, Novethic published a study about ESG performance indicators. 

Read the study here.

Low disclosure of ESG data

Disclosure of environmental, social and governance data is an unfamiliar practice in the financial industry: in contrast to the widely standardized financial data (alpha, beta, sharpe ratio, etc.), only a few investors integrate ESG data into their reporting practices. However, several incidents in the last years have shown that this extra-financial data enables investors to have a better idea of the riskiness of their investments. These disclosures deal with environmental policy, social and employee issues, human rights, anti-corruption and diversity in the board of directors.

Standardization of ESG data in corporate reporting

Due to a lack of standardized corporate ESG reporting, investors are struggling with the materiality of this ESG reporting and how they should read the data. In the last years, several initiatives were created that aim to integrate ESG data in corporate reporting. The Global Reporting initiative (GRI) sets up a framework of extra-financial information which companies should report in their financial statements. More recently, the Sustainability Accounting Standards Board (SASB) focuses on developing and disseminating sustainability accounting standards that help public corporations disclose material and useful information to investors. The European Union is also pushing for this this development with a new law. Large public-interest entities (listed companies, banks, insurance undertakings and other companies that are so designated by Member States) with more than 500 employees should disclose in their management report relevant and useful information on their ESG policies, main risks and outcomes.

Recently, the Securities and Exchange Commission (SEC) has issued a request for comment on modernizing certain business and financial disclosure requirements ). Many investors use this request to push for better standardized ESG reporting disclosure practices. Eventually, each year a so called Corporate Knight’s report shows the ranking of 45 stock exchanges based on sustainability disclosure. The rankings are based on the disclosure of seven sustainability indicators (GHG emission, injurity rate, water, personnel payroll, energy, waste, employee turnover) by issuers listed on the exchange.

Aggregated ESG scores

Investors are aggregating the individual ESG score of their holdings to an overall ESG score. A higher score indicates that the fund has a strong ESG performance. This information is often compared to a reference figure (benchmark or historic fund data).

ESG key performance indicators

Investors are choosing one or several key non-financial figures that have a major impact on the performance of the fund. These non-financial figures could be related to social issues, such as the jobs created in all holdings, or they could be related to governance, such as the independence of Board of Directors and Supervisory Board. This data is used either to strengthen the risk-return profile of the portfolio or to increase the sustainable impact of the portfolio.

Read the Novethic study about ESG Key Performance Indicators.

One specific Key Performance Indicator gained high attention by investors: the carbon footprint of portfolios.

Carbon reporting

Investors are pledging to initiatives (Montreal Carbon Pledge, state the othersPortfolio Decarbonization Coalition, Paris Pledge, Divest-Invest, IIGCC, INCR, IGCC) in which they commit to disclose the carbon intensity (Carbon footprint, see also our section Finance and Climate) of their portfolios. The reporting forms are heterogeneous as investors are struggling with methodological challenges (scope of emissions). In cooperation with the PRI, Novethic has conducted a study about the implementation of the Montreal Carbon Pledge by the Signatories.

Additionally, policymakers are introducing regulatory frameworks which push investors to disclose this data. In this field, France is a leader and innovator with its Article 173 of the new law on Energy Transition and Green Growth.

Business case for france

In France, the disclosure of extra-financial data has reached a new level. The article 173 of the new law on Energy Transition and Green Growth asks asset owners, for the first time, to comply with specific non-financial reporting requirement depending on their asset size. All asset owners, in total some 800 institutions, are obliged to disclose ESG information. Furthermore, asset managers with a balance sheet greater than €500m, in total 60 institutions, have to report as well about climate-change related risks and their contribution to the financing of the green economy. The first reporting has to be done for the full year 2015. 

Click here for Novethic's analysis of Article 173.