Most companies are not worried about receiving an adverse ESG rating when developing plans and strategies, a report from the Financial Reporting Council (FRC) found.
“However, they were concerned that investors may place reliance on the headline ratings,” the report said.
Therefore, companies often find themselves “playing the game” to receive a positive rating.
With numerous ESG data providers in the industry, there are often differences in the research and reliability of these organisations.
“Both companies and investors would welcome greater transparency on the methodologies used by ESG rating agencies,” the FRC added.
Sustainalytics, owned by financial service Morning Star Holdings (ASX:MSH), is one of the leading producers in both ESG ratings and research.
When producing a rating, the group looks at a company's total exposure to ESG risks and observes how much of these issues are not being addressed by management.
It is this section of ‘unmanaged risks’ that then provides the baseline for the ESG rating, with the fewer concerns managed the worse the ranking.
However, there are still fears about how risks and management of them are measured.
The Digbee approach
Digbee Limited is the only firm in the world that provides ESG ratings and advice for the mining industry.
Jamie Strauss, chief executive officer at the London-based group believes that managing ESG is much more than a rating or report.
He told Proactive: “In my perspective an individual score means nothing.
“What is more important is where the score goes over time, how the management understands the key topics that are involved in ESG.”
Strauss believes that the corporate-focused top-down approach used by many rating companies is not as effective as assessing ESG risks from the “bottom-up”.
“Understanding the impact of the mining industry can only be done by looking at what a company is doing at a local level… reviewing if a firm is earning credibility from the community it serves,” Strauss added.
Companies, not just in mining, often hire ESG experts to tackle specific tasks like reducing greenhouse gas emissions or ensuring diversity in the workplace.
However, they are trained in improving ESG, not disclosing it.
The ESG-focused boss said: “What Digbee is trying to do is give companies confidence in independent assessments, which will allow them to then strategise before taking action.”
As debates on issues like Shell and BP’s energy transition plans or Shein’s treatment of Chinese factory workers come to the forefront, it could be argued a Digbee-inspired bottom-up approach is what is needed across these industries.