What is ESG rating?

The environmental, social and governance (ESG) information of listed companies has always been valued by the global capital market, and more mature ESG investment and rating systems have been developed. Following the inclusion of Chinese A-share by MSCI, ESG ratings are also gaining more attention in China.

The benefits of ESG ratings for businesses

First of all, an outstanding ESG rating reflects market recognition of the company's social responsibility efforts and performance, which helps to improve brand image. In addition, many European and American financial institutions have taken the ESG rating into consideration in investment screening process. Therefore, a good ESG rating can further help companies to attract investment and lower the cost of financing.

The existing ESG rating systems on the market

There are various ESG rating systems set up by different rating agencies, some of the rating systems are ESG performance-based while some of them are ESG risk-based. Right now, the renowned ESG rating agencies in the world include MSCI, RobecoSAM (acquired by Standard & Poor's in 2020), CDP Global Environmental Information Research Center, FTSE Russell, etc. In Hong Kong, Hang Seng Indexes collaborates with Hong Kong Quality Assurance Agency to introduce the ESG rating system.

ESG rating methodology

ESG rating agencies rate the companies based on their ESG policies, systems and measures, and they gather from multiple sources including company's publication, Government data bank, media, NGOs or other stakeholders. Questionnaire may also be used to collect additional information from the companies.

During the rating process, the agencies will use a specific mechanism to adjust the score of the company based on its industry. At the same time, the relative performance of the company against its peers will also be used as a benchmark to obtain a universal rating that is comparable across industries.

How to improve ESG rating

When the company decides to join the ESG rating scheme, it needs to establish a sound ESG governance structure to ensure that there are sufficient and effective ESG management policies and systems, internal controls, implementation measures in order to achieve good ESG performance as well as forming a loop to continuously improve and optimize the performance. On the other hand, before submitting ESG data to rating agencies, companies should also review the data to ensure that it clearly, accurately and effectively addresses the rating criteria.