JT: How do you think the ESG ratings landscape might evolve going forward? Will we see a concentration to a handful of players like for credit ratings? Or will we see a number of different players who essentially do different things and perhaps explore their own various niches?
RB: Today, this is still an emerging ﬁeld, so you have a lot of people with aspirations in it, including potential new entrants. But in reality, in terms of the ESG ratings that are actually used by shareholders and investors, we are already in a situation where we are the leading player. I would argue that Sustainalytics is a close contender, but no one else is on a par.
From an investor perspective, the logic of using a materiality framework for ESG ratings is more established. In order to achieve the precise assessment it requires, using alternative data, signiﬁcant investments are needed. This drives a need for scale and ﬁnancial muscle. Just consider looking at climate change, as an example, and speciﬁcally systematic physical risk for the company or investment portfolios in real estate. To collect and analyse the data, in the case of a building you need the address to be able to inspect it. Ultimately, all the rest is models. And climate models on how to measure potential damages, etc, are relatively complicated, so you need big resources to develop them. Our view is that we will see ever greater sophistication in these analyses, which not all players will have the capacity to develop. To give a full assessment of ESG risks, which is the purpose of the rating, you need to have that breadth and depth.
There is always innovation, which is of course a good thing. So you will have players with a very speciﬁc new data set. This could be interesting and relevant. But again, it's not that easy to create something which is all encompassing in terms of the number of issues, and also with a coverage of companies that is big enough to cover both equity and ﬁxed income.
JT: How should corporates think about ESG ratings, whether or not to obtain one, and which one to choose?
RB: Companies should think about sustainability in the context of their business models. Companies that manage long-term risks properly or better than their competitors tend to have a big focus on also capturing sustainability opportunities, either in their product range, or by being more efficient. So what matters is not necessarily to try to tick the boxes for the rating score. Sure, that looks good. But what we measure is the strategic ability to have revenue growth linked to sustainability or to manage risks better, so you ensure that you don't lose your licence to operate.
An ESG rating can help a company focus its attention on those key issues that are very relevant, and then work through a benchmarking exercise to understand who the leaders are. For a particular sector, which companies are the best-in-class players and how can you as a company get to that level? This will again make them think about product strategy, efficiency and the element of disclosure.
The end goal should be managing risk and seizing opportunities better than the competition, which goes beyond trying to optimise an ESG rating score. But the score does ultimately matter, and it is what we are trying to measure. The rating is a powerful benchmark for ESG progress, and that is often why companies subscribe to our ratings. But this is just a means to an end. The end goal is to be successful in the long run.
As for what ESG rating to choose, an easy option is to simply listen to your shareholders. How do they measure ESG performance? In reality, they mostly use MSCI and Sustainalytics ESG ratings. If you want to use another yardstick, it is up to you to argue your case for why you do.