ESG ratings have become important when investors analyse their potential future investments, and therefore it should not be neglected by companies.

Most ESG ratings measure companies' exposure to risks and opportunities related to E (Environmental), S (Social) and G (Governance). A high rating, among other things, mean that the company is good at handling these risks. Many investors prefer to invest in companies with a good rating, as they often have easier access to capital, better brand reputation, easier to attract talent and have better control over their risks.

ESG ratings can influence pricing

The most used rating agencies are MSCI, Moody's, Sustainalytics and ISS, and the largest institutional investors typically supplement with their own models. Since most investors use ESG ratings in their investment decisions, a bad rating can mean that the company is delisted or that the share is priced at a discount to the closest peers.

It is often about data

Most companies can improve their ratings by analysing the rating agencies' methods and the results of their analyses. By understanding the meaning of the individual criteria and where the company's strengths and weaknesses lie, you can identify your gaps and react to them. Often it is about a lack of data and reporting, but it can also be due to a lack of handling of risks or "ESG controversies". The analysis will also provide a greater understanding of how the outside world views the company's ESG performance and can be a good input to ensure that the ESG strategy and reporting meet the market's expectations.

But the work with ESG ratings can be particularly resource intensive for companies. Which rating agencies should be prioritised, how do their models work, what is needed to achieve a better score and how do you find resources to answer the extensive questionnaires?

How can KPMG help?

In KPMG's ESG and Investor Relations Services, we offer ESG Rating Advisory, where we help companies to:

  • prioritise the rating agencies that are most relevant to the individual company
  • understand the questions in the extensive questionnaires and help answer them
  • analyse possible "controversies" and how they affect ESG ratings
  • analyse the underlying results and identify gaps
  • preparation of an action plan for the company with proposals to improve ratings in the short and long term.

KPMG has developed a big-data analytical platform, ESG IQ, which helps analyse data from a wide range of rating agencies, social media, blogs, NGOs and external analyses. The platform can help analyse the company's ESG performance in a broader perspective and relate it to the most relevant peers.