The panic is rising: you received an ESG rating update – and it doesn’t look good! In this article we explain what you can do to upgrade your rating in the short term without having to change your entire company structure.
ESG ratings from large rating companies such as ISS, MSCI or Sustainalytics include many different factors in their ratings. As the name ESG suggests, these range from environmental (E) and social (S) to governance (G) aspects. Depending on the rating, a different number of factors are considered.
In order to understand how a rating can be improved, it is necessary to first be clear about the basic approach for creating a rating.
How Do I Get My Rating?
Each rating agency uses a different method for its calculation and rating. For example, Sustainalytics’ rating includes the risk (“Risk Exposure”) to which the company is exposed, the proportion of the risk that can be influenced (“Manageable Risk”) and the proportion of the risk that cannot be influenced (“Unmanageable Risk”). This results in the “Total Exposure to ESG Risk“. After determining the Total Exposure to ESG Risk, the Rating Company considers the “Management Gap“. This is the gap between the possible Manageable Risk and what is already being done (“Managed Risk”).
The final ESG risk rating is therefore the management gap plus the company’s unmanageable risk. For this reason, the optimal rating results also differ depending on the industry, as the Unmanageable Risk is significantly larger in the textile industry, for example, than in the case of a software company.
Short-term Rating Improvements – the Approach
In general, all measures that are initially purely text-based are easier to implement than complex management systems. Often a statement on a certain topic is already enough for rating agencies to be able to enter a good rating. Otherwise, it is often sufficient to set up existing guidelines and commitments in the form of a formal “policy “.
Environmental Quick Wins
The environmental section is the most comprehensive in an ESG rating for many industries. This includes aspects such as water consumption, CO2 emissions or sustainability in the supply chain.
In the environmental field, frequently requested elements are a general environmental policy, i.e. company guidelines, on what the goals are in environmental and climate protection and how these are to be tackled. Among other things, this also includes showing what influence the company itself has on the environment and climate change and how this can be countered.
This is accompanied, for example, by targets and action plans to reduce greenhouse gas emissions. Via the Science Based Targets, these reduction targets can be scientifically assessed and confirmed. This reinforces the own promise and enables a realistic assessment of the achievability of the goals.
Finally, companies should also think about ISO 14001 certification. The prerequisite for this is, among other things, an environmental policy – and then the step to certification is not so far away.
Social Quick Wins
The requirements in the social part of an ESG rating relate in particular to the working conditions of employees. This includes, among other things, the explicit avoidance of child- and forced labor.
One short-term measure is the signing of the UN Global Compact. In addition to environmental aspects, this also integrates basic standards in the social sector. By signing the UN Global Compact, this commitment also becomes publicly visible – and those who already publish a sustainability report can simply submit it.
As a further measure, a diversity program should be set up. This focuses especially on gender equality, persons with other nationalities or migration backgrounds, or equal opportunities for people with physical or mental disabilities.
A third factor is a listing of the opportunities offered to employees in the workplace. One example is the option to take special leave to care for relatives. In addition, these options also include describing how employees are enabled to work flexibly, e.g., via part-time models and home office options.
Governance Quick Wins
In our experience, governance is usually the area where it is most difficult to establish concrete and measurable figures – especially since this involves factors that are often fixed or difficult to influence and are related to the Executive Board and Supervisory Board. But even here there are some possibilities to achieve an improvement in the rating with already little effort.
A very important measure is writing down a code of business conduct. In this, the company undertakes to prohibit corruption, violations of competition law or the excessive use of gifts and favors above a reasonable value.
In addition, an overview of the board diversity should be publicly available. Diversity should ideally reflect not only different genders, but also ages, nationalities, or specialties. But this is the task of the company. For a short-term ESG rating improvement, transparency, and a comprehensible will to improve are especially important.
A third adjustment, which requires a little more effort but is all the more effective, is the establishment of a whistleblower system. Ideally, it is constantly reachable and 100% guaranteed anonymous. In addition, it should be available in all languages of the company and integrated into a general whistleblower policy.
In addition to all the quick wins, however, the long-term ESG strategy should not be lost from focus. Only through continuous improvement and internal restructuring can a better rating be achieved – and the company effectively demonstrate that it is contributing to greater environmental protection and high social standards.
You want to improve your ESG ratings in the short and long term? Feel free to contact us – we will efficiently support you with the next steps!