An ESG ratings primer

Here’s the intro from this note by Madhavan Nampoothiri that teases this primer about ESG ratings:

While the term “ESG” was first mentioned in a 2005 UN PRI report called “Who Cares Wins”, the US-based firm KLD Research & Analytics Inc had started providing social and environmental performance data for a limited number of companies as early as 1991. Dutch firm Sustainalytics is another prominent example of pioneering ESG rating providers.

As the interest in socially responsible investing, which morphed into ESG investing, grew, the need for actionable data related to the non-financial performance of a business also grew. Naturally, the number of ESG rating providers increased drastically, and SustainAbility, an ERM group company, came up with a “Rate the Raters” report in 2010 to compare these rating providers. In its 2020 “Rate the Raters” report, SustainAbility reported that more than 600 ESG ratings and rankings existed globally in 2018 and continued to grow (read the report here).

As with any other industry, the ESG rating industry has also consolidated, with several smaller niche ESG rating providers getting acquired by the more prominent players, including Bloomberg. The 2020 “Rate the Raters” report provides an excellent overview of the Mergers and Acquisitions(M&A) of ESG rating providers during the last decade(read here). In addition, while several ESG ratings providers are standalone firms, large entities like the “Big Three Credit Rating Agencies” (Fitch, S&P and Moody’s) also emerged as formidable ESG rating providers.