ESG (Environmental, Social, and Governance) ratings are scores or assessments that measure the issuer's performance and management of environmental, social, and governance factors.
Here are the key points about ESG ratings:
ESG ratings evaluate an issuer's exposure to environmental risks (e.g. carbon emissions, energy efficiency), social risks (e.g. labor practices, product safety), and governance risks (e.g. board diversity, executive compensation).
They provide a quantitative measure of an issuer's non-financial performance on ESG issues, typically using a numerical score or letter grade.
ESG ratings allow investors, analysts, and stakeholders to assess an issuer's long-term sustainability risks and opportunities beyond just financial metrics.
How are ESG Ratings Calculated?
Rating agencies collect data from issuer reports, media sources, NGOs, and other public sources to evaluate ESG performance.
They use proprietary methodologies to weigh different ESG factors based on their perceived importance and an issuer's industry.
Common frameworks look at policies, performance metrics, management systems, and controversies related to ESG issues.
However, there is no standardized methodology across rating agencies, leading to divergent ratings for the same issuer.
Importance of ESG Ratings
ESG ratings help issuers identify and manage ESG risks like environmental impacts, labor issues, and governance lapses.
Strong ESG ratings can improve the borrower's reputation, attract investment, reduce costs of capital, and drive financial performance.
For investors, ESG ratings provide insight into a the borrower's long-term sustainability and risk management beyond traditional financial analysis.
