Lifting the veil on environment-social-governance rating methods

Purpose - – There is growing recognition that numerous business drivers contribute to financial performance and investment returns but they are not included in a company's profit and loss statements. In the investment industry, these wider sets of value drivers are known as environment-social- governance (ESG) factors. A small number of specialized ESG rating agencies provide information to investors about the extent to which firms' behaviors are socially responsible. However, a major criticism of these rating agencies is the lack of transparency in their methods. This paper aims to examine the issues of subjectivity, transparency and uniformity of ESG ratings by exploring the methods used to assess ethics performance by an Australian rating agency. Design/methodology/approach - – A case study was conducted on an Australian ESG rating provider, Regnan. The data for the analysis were sourced from internal Regnan documents. Findings - – The paper found that a level of subjectivity is inevitable in ESG ratings and the call for uniformity may inhibit innovation, but these issues can be addressed by increased transparency of the rating methods. Research limitations/implications - – Further research is required to understand what level and, combination of, uniformity and transparency is sufficient to satisfy stakeholder requirements for ESG information. Practical implications - – The discussion of the factors underlying the ethics performance rating may prompt more open and transparent debate on how to assess ethical performance of companies, and increase investor confidence in ESG ratings. It may also provide more direction to companies on how to strengthen their ethical performance. Originality/value - – There is growing recognition that numerous business drivers contribute to financial performance and investment returns but they are not included in a company's profit and loss statements. These “ESG” factors can account for up to 66 percent of the market value of globally listed companies. In response to calls for more transparency on how ESG factors are assessed, and how ethical performance is appraised, this paper attempts to lift the veil on ESG rating methods.