As investors increasingly push to assess companies’ Environmental, Social and Governance (ESG) performance, our publicly traded clients and potential clients often ask us how they can improve their investor rating scores. This question is more complicated than it seems. We recently analyzed six ESG frameworks and distilled the trends and most effective approaches to provide some simple guidance to companies just starting their ESG journeys.
Start with Materiality
Investors want to know that a company has diligently assessed the issues that will have the greatest impact on its finances and business continuity. Thus, our first recommendation is to complete a simple materiality analysis if at all possible. Every company and industry has its own set of material issues1. Ideally, each company determines what is material to its business based on its sector, culture, values, stakeholders, and business model. SustainabilityNext helps companies with the materiality assessment process by using available research gleaned from expert frameworks, peer benchmarking, and robust stakeholder engagement. A company has the best chance of improving its ESG performance—and ultimately its investor rating scores—by tailoring its ESG strategy and metrics to specific material issues.
Our Research
Many of our clients—and in particular those just starting their ESG journeys with few or no resources to conduct a materiality assessment— desire a simpler approach to investor ratings. In response, we have analyzed the topics that are most frequently covered in rating agency questionnaires and investor-based reporting frameworks.
The following sections and charts compare information from the reporting frameworks of six investor-focused entities that are most frequently used or referenced by our corporate clients: SASB, MSCI, ISS, Sustainalytics, Vigeo-Eiris, and BlackRock.
All of these frameworks also focus on investors, in contrast with other frameworks that may have a wider target audience. See the methodology section and references for more information on how we conducted our research.
What Does SustainabilityNext Research Say?
The “top 10 topics” chart below shows that environmental and social issues are fairly evenly covered by investor surveys and requests for information.
Table I: Top 10 Overall Topics
Topics on this list were included in all six frameworks.
| Topic | Category |
| Emissions (GHG) | Environmental |
| Emissions (other air emissions) | Environmental |
| Energy | Environmental |
| Waste | Environmental |
| Labor management and practices | Social |
| Occupational health and safety | Social |
| Employee benefits and retention | Social |
| Employee training and education | Social |
| Diversity and inclusion | Social |
| Supply chain | Environmental/Social |
ENVIRONMENTAL TOPICS
On the environmental side, emissions of greenhouse gases (GHGs) and other substances are consistently among the key topics of interest to investors. Beyond the six entities we studied, other reporting platforms such as CDP (previously known as the Carbon Disclosure Project) and Task Force on Climate-related Financial Disclosures (TCFD) focus almost exclusively on greenhouse gas emissions and climate risk disclosures. Investors ask most often for metrics on emissions totals, the amount of reduction, and the emissions intensity of companies’ products and services.
Energy use is closely linked to GHG emissions. With a clear focus on companies’ bottom line, investors want to see metrics that demonstrate increased energy efficiency and a movement toward decarbonizing energy sources.
For many companies at the beginning of their ESG journeys, focusing on environmental issues makes sense because projects that reduce energy, emissions or waste often produce clear and tangible financial ROI. Also, environmental projects typically yield straightforward metrics to show progress.
Click here to learn more about some of the concrete environmental impacts our clients have achieved.
Table II: Environment
| Topic | Framework Frequency |
| Emissions (GHG) | 6/6 |
| Emissions (other air emissions) | 6/6 |
| Energy | 6/6 |
| Waste | 6/6 |
| Supply chain* | 6/6 |
| Climate risk | 5/6 |
| Materials | 4/6 |
| Water | 4/6 |
SOCIAL TOPICS
Although data on the benefits of pursuing social issues has been slower to develop, investors are starting to pay more attention to this area. Our research shows that investors are scoring companies on their labor management practices and overall work environment, including health and safety, training and education, and diversity and inclusion. Investors are expecting companies to establish policies against the use of child labor and forced labor as well as policies and management systems that promote workforce diversity and inclusion and that keep workers safe and healthy. In most cases, investors are expecting measurable goals and milestones.
In our work with companies over the past seven years, we have seen businesses struggle with programs and key performance indicators (KPIs) in many of these social areas. As a result, companies often receive low social scores from investor rating agencies.
Some companies have implemented initiatives but have not yet set measurable targets. Other companies might be unwilling or unable to disclose metrics in their sustainability/ESG reports; this is often the case with regard to health and safety. In some areas, such as diversity, equity and inclusion (D, E & I), businesses recognize that they need to address a set of issues—often as a result of employee surveys—but struggle to build consensus internally on what these programs should look like or which data to track. D, E & I has emerged as a major issue amid the growing Black Lives Matter movement and recent data highlighting the lack of diversity in corporate leadership. As a result, companies are reevaluating their role in perpetuating racism both internally and externally. Going forward, we hope to help companies develop practices and metrics that address the root causes of these issues.
Although the topic of managing supply chains in environmentally and socially responsible ways is on our overall “top 10” list, we see many companies struggling to determine how they should tackle these objectives and what to disclose. Human-rights issues and climate-related natural disasters have plagued major supply chains around the globe for years, and now a global health pandemic is further disrupting supply chains. Even so, many of our clients face challenges convincing internal stakeholders to take action, such as by investing in programs that will allow the company to manage supply chains in more environmentally sound and socially responsible ways.
Table III: Social
| Topic | Framework Frequency |
| Labor management and practices | 6/6 |
| Occupational health and safety | 6/6 |
| Diversity and inclusion | 6/6 |
| Employee benefits and retention | 6/6 |
| Employee training and education | 6/6 |
| Supply chain* | 6/6 |
| Non-discrimination | 5/6 |
| Public policy/political contributions | 5/6 |
| Customer health and safety | 5/6 |
| Local communities | 4/6 |
| Marketing and labeling | 4/6 |
| Customer privacy | 4/6 |
GOVERNANCE TOPICS
While no governance issues made our overall “top 10” list, several appeared in 5 out of 6 frameworks.
Investors remain interested in whether a company has a board committee focused on corporate social responsibility, as well as in the composition of the board as it relates to various diversity aspects such as race, gender, age, and professional experience and skills. We also see that investors have been looking at linkages between remuneration and compensation policies and processes and ESG or other non-financial targets, as well as transparency around payment philosophy and performance.
Table IV: Governance
| Topic | Framework Frequency |
| Governance structure and composition | 5/6 |
| Anti-corruption | 5/6 |
| Remuneration/compensation policies and process | 5/6 |
| Grievance mechanisms | 4/6 |
| Board ESG role/responsibility | 4/6 |
| Conflicts of interest | 4/6 |
| Anti-competitivebehavior | 4/6 |
| Tax Approach, Governance, and Disclosure/Transparency | 4/6 |
Where Are We Headed?
Since the beginning of the global health pandemic in early 2020, many questions have arisen about whether investors will continue to focus on ESG issues as we fall into an economic recession. Experts ranging from UBS to CitiBank to Blackrock echo a resounding “yes.” In fact, most investor representatives tell us that ESG issues will become more important. The data are starting to show that companies with robust ESG strategies and metrics are more resilient and have fared better during this crisis.
The pandemic has brought inequities in remuneration and pay policies to the forefront as low-wage, front-line workers are furloughed or fired while CEOs receive bonuses. Companies’ health and safety and training practices are also under greater scrutiny. In addition, racial equity issues that have surfaced as a result of both COVID-19 and the Black Lives Matter movement will likely become increasingly important as investors assess whether companies are well-positioned for the future.
Conclusion
Companies across all industries are likely to be asked about a number of key topics by investors who are engaging on ESG. While we strongly urge every company to conduct its own materiality assessment and research to determine the right set of material issues and metrics to disclose, our “top 10” topics can serve as a starting point alongside the list of key governance topics. We are interested in seeing how future investor surveys and questionnaires will reflect the new reality brought about by COVID-19 and the social justice movements sweeping the globe.
Methodology and References
Our research included reviewing investor frameworks, surveys, and guidance to understand which topics were of interest to which investor entity. We then calculated the number of times a topic or indicator appeared across multiple frameworks and surveys. Totals for each topic were ranked to determine which topics appeared most often.
Table V: ESG Frameworks and Surveys Analyzed
| Name | Type of Framework | Description and/or link to referenced material |
| SASB | Voluntary disclosure1 | Materiality Map, Standards |
| MSCI | Rating agency2 | MSCI ESG Ratings Methodology |
| ISS | Rating agency | Environmental & Social Key Issues, Governance Tech Doc |
| Sustainalytics | Rating agency | Industry-Specific Questionnaire |
| Vigeo-Eiris | Rating agency | Industry-Specific Questionnaire |
| BlackRock | Investor3 | BlackRock does not have a survey or questionnaire but provides guidance on its primary interests at Investment Stewardship Engagement Priorities |
We recognize that these entities do not play the same exact role in the ESG investing and rating world and that they might have widely divergent methodologies for measuring and weighting these issues for their assessment of corporate ESG factors. Because some of our analysis is based on industry-specific questionnaires, it might not represent a complete picture of the included rating agencies. Also, BlackRock has no public scoring or rating system but does publish guidelines for topics upon which it engages companies in its portfolio.
- Voluntary disclosures are guidance frameworks that provide recommended reporting topics and metrics to assist companies determine how to best prioritize and communicate ESG topics that are relevant to their business. Disclosure topics can be related to both financial and non-financial performance.
- Rating agencies are third-party data aggregators. Companies are assessed based on publicly available information, such annual filings, sustainability reports, company websites, publicly available company policies, and media sources. The data may be made public or made available exclusively for the company.
- Investors are companies such as asset managers who invest on behalf of others and engage directly with companies.
References
Berg, F., Koelbel, J. F., & Rigobon, R. (2020, May 18). Aggregate Confusion: The Divergence of ESG Ratings SSRN https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3438533
BlackRock. (n.d.). Investment Stewardship Guidelines. Retrieved May 10, 2020 from https://www.blackrock.com/corporate/about-us/investment-stewardship#guidelines
Fekete, T. (2020, April 28). Sustainable investing: enduring through COVID-19 and beyond. BlackRock. https://www.blackrock.com/institutions/en-gb/our-clients/defined-contribution/esg-amid-covid-and-beyond
GRI. (2018, July 1). GRI 101: Foundation 2016. https://www.globalreporting.org/standards/gri-standards-download-center/
ISS. (n.d.). E&S Disclosure QualityScore. Retrieved May 21, 2019 from https://www.issgovernance.com/esg/ratings/environmental-social-qualityscore/
ISS. (n.d.). Governance QualityScore. Retrieved May 21, 2019 from https://www.issgovernance.com/esg/ratings/governance-qualityscore/
MSCI. (2019, September). MSCI ESG Rating Methodology. Retrieved September 13, 2019 from https://www.msci.com/documents/1296102/14524248/MSCI+ESG+Ratings+Methodology+Exec+Summary+2019.pdf/2dfcaeee-2c70-d10b-69c8-3058b14109e3?t=1571404887226
SASB. (n.d.). Download Current Standards. Retrieved September 9, 2019 from https://www.sasb.org/standards%20overview/download-current-standards/
SASB. (n.d.). SASB Materiality Map. Retrieved September 30, 2019 from https://materiality.sasb.org/
SEC. (2020, May 14). Recommendation from the Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee Relating to ESG Disclosure. https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-esg-disclosure.pdf
Whieldon, E., Copley, M., & Clark, R. (2020, April 13). Major ESG investment funds outperforming S&P 500 during COVID-19. S&P Global. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/major-esg-investment-funds-outperforming-s-p-500-during-covid-19-57965103
This information has been prepared by SustainabilityNext for informational purposes only and is provided with no representation or warranty as to its accuracy or completeness. Nothing contained herein should be construed nor relied upon as investment, financial, legal, or tax advice. SustainabilityNext is not responsible for any damages or losses arising from any use of this information.