For companies that want to remain attractive to the investment community, the rise of environmental, social and corporate governance (ESG) investing is an important trend to monitor. In 2018, Morningstar Research estimated that the total assets managed in portfolios that incorporate elements of ESG investing has grown by more than 600 percent over the last decade to $23 trillion worldwide.
This trend has contributed to the creation of firms known as ESG research providers, which collect and evaluate data on a company’s environmental, social and corporate governance practices. Using their own proprietary methodologies, these ESG research providers develop profiles on thousands of companies, often rating each company on its ESG-related disclosure or practices.
Institutional asset managers are increasingly incorporating the ratings from these ESG research providers into their screening process when identifying new investment opportunities. It’s important, therefore, for companies to understand the existing landscape of ESG research providers and how they operate:
- According to the Global Initiative for Sustainability Ratings, there are more than 150 ESG research providers worldwide, including firms like Arabesque, Bloomberg, CDP, Covalence, CSRHub, Ethos, FTSE Russell, MSCI, RepRisk, Sustainalytics, Thomson Reuters and VigeoEIRIS.
- ESG research providers generally rely on publicly available information, data-intensive company questionnaires or a combination of the two to inform their research and ratings.
If you receive a questionnaire from one (or a dozen) of these ESG research providers seeking information on your company’s ESG disclosure and practices, it’s important to consider a few pros and cons of responding:
- Pro: Responding allows your company to better ensure the accuracy of the data used to determine your rating.
- Pro: Responding may set your company apart from those that decline to participate. Many ESG providers give higher ratings to companies that provide more ESG-related disclosures, and some even denote which companies did not respond to their questionnaires.
- Con: Responding can be a significant drain on your organization’s time and resources. Some questionnaires are estimated to take 1,000 hours to complete and require input from as many as 30 employees across multiple departments.
With 150+ ESG research providers out there, determining how best to participate in the data-gathering process is likely to become increasingly important for corporate management teams. Here are some tips for handling inbound questionnaires from ESG research providers:
- Ascertain the relevance of the requesting organization.
- How many institutional investors actively subscribe to the ESG provider’s research and/or ratings?
- Is the ESG research provider’s data integrated into software that is commonly used by institutional investors, such as Bloomberg or FactSet?
- Are the provider’s ratings utilized by proxy advisory firms, such as Institutional Shareholder Services (ISS) or Glass, Lewis & Co?
- Get a sense of what’s involved in responding.
- Understand what information will be assessed by the questionnaire and the internal resources that will need to be involved to provide a comprehensive response.
- Estimate how long a questionnaire will take before deciding whether to participate.
- Consider potential alternatives to participating in questionnaires.
- The majority of ESG research providers rely primarily on publicly available data. Leverage the relevant public disclosure that your company is already providing and make sure that ESG research providers are able to easily access it.
- Develop an annual corporate social responsibility or sustainability report to be published on the company website.
If you’re looking for additional advice on the ESG research provider landscape and how to triage inbound questionnaires, Westwicke can help. Get in touch.