ESG Rating
Definition
An ESG rating is an assessment of a company's exposure to and management of environmental, social, and governance risks and opportunities. Provided by agencies such as MSCI, Sustainalytics, and S&P Global, ESG ratings aggregate data from corporate disclosures, news sources, and stakeholder reports. Ratings are used by investors to screen, compare, and evaluate companies on sustainability performance.
Why It Matters
ESG ratings significantly influence investment decisions and capital allocation, with trillions of dollars in assets under management using ESG ratings as a screening tool. However, divergence between rating providers remains a challenge for companies and investors alike.
Related Terms
ESG Integration
ESG integration is the systematic inclusion of environmental, social, and governance factors into investment analysis and decision-making processes. Unlike negative screening or exclusion, ESG integration uses ESG data alongside traditional financial analysis to build a more complete picture of risk and opportunity. It is the most widely practised responsible investment approach globally.
CDP (formerly Carbon Disclosure Project)
CDP is a global non-profit that runs the world's leading environmental disclosure system for companies, cities, states, and regions. Through annual questionnaires, CDP collects and scores data on climate change, water security, and forests. Over 23,000 companies disclose through CDP, making it the most comprehensive source of self-reported corporate environmental data.
EcoVadis
EcoVadis is a business sustainability ratings platform that assesses companies across four themes: environment, labour and human rights, ethics, and sustainable procurement. Using a combination of documentation review, industry benchmarking, and third-party data, EcoVadis provides a scorecard from 0 to 100 with medal levels. Over 130,000 companies across 175 countries have been rated.
Materiality Assessment
A materiality assessment is a structured process for identifying and prioritising the ESG topics that are most significant to an organisation and its stakeholders. It typically involves stakeholder engagement, peer benchmarking, and analysis of business impact to determine which issues warrant strategic focus and disclosure. The output is usually a materiality matrix ranking topics by importance.