(Photo by Markus Spiske from Unsplash)

As environmental, social and governance (ESG) performance gains relevance in corporate management, the practice of setting ESG ratings as a baseline for doing business has become more prevalent.

ESG ratings as a baseline — you can’t compete without a rating

“We were unable to bid because our ESG score was low”

This was what I heard from a B2B company in Japan recently. These days, there are now cases in which participation in bidding is contingent on ESG scores. And with the development of laws and regulations on financial institutions, large companies and listed companies in the EU, the trend is leaning towards making these ratings a baseline for investing, lending and selecting business partners.

When it comes to doing business, low ESG scores are beginning to represent a barrier to entry for companies. Confronted with this reality, both management and staff are getting serious and taking action on ESG issues more readily. However, there is an issue with this approach: simply getting the score could end up becoming the main objective, and once this is accomplished, there may not be any desire to further enhance their initiatives.

The following keywords offer a way to overcome this hurdle and motivate companies to set their sights even higher: comparability and transparency.

Race to the top — raising standards to a higher level

When ESG ratings are comparable and transparent, companies can access information about their own ratings, the rating results of other companies and other leads for improvement. Comparability and transparency are also important when it comes to getting the most out of the results — the easier it is to see how investors and other stakeholders are using the ratings, the more resolved companies become to change.

Sustainalitycs, a leading ESG rating firm, allows anyone to view score summaries for each company they assess. In areas where NGOs get involved as a major player, there is an even greater level of transparency. CDP, which assesses engagement on climate change, water security and forests, publishes all of its corporate response data for anyone to browse. Similarly, the Corporate Human Rights Benchmark (CHRB), which evaluates how companies embed respect for human rights in their business practices, also publishes a detailed scorecard in addition to ratings for each company.

Some companies are also disclosing assessment results with a high degree of transparency. French oil company TotalEnergies reports the gap between its own scores and the average of those of industry peers across seven ESG ratings. And Norwegian financial institution Sparebanken Sør has made their Sustainalytics assessment report available to download online.

After analyzing trends in companies it has rated in the past, supply chain assessment entity EcoVadis revealed in a study that there is a cycle of improvement centered on disclosure results in earning higher scores.

Through open dialogue and highly transparent disclosures and ratings, I hope that both the evaluated and the evaluators can foster an environment that perpetuates this cycle of improvement to advance the sustainability of both business and society.

Takeshi Nozawa (author), translation by Melody Poland