The ESG Rating Industry
The ESG data and services industry has now become a billion dollar industry. Out of that, ESG ratings forms a substantial part of it with big names such as MSCI, Moody’s and Sustainalytics involved. Currently, there are over a 160 firms selling such ratings. They measure the risk of a company against various ESG (Environmental, Social and Governance) factors and provide a rating similar to credit ratings (AAA, AA etc) or scores ( from 1 to 100). These ratings are used by investment houses, pension-funds, institutional investors and others to make investment and funding decisions, moving nearly $35 trillion in monetary assets.
The Problem
Recently, these rating providers have come under the regulatory fire due to lack of transparency behind what goes into the ratings and greenwashing. Assigning higher scores to oil and gas companies (which have some of the largest carbon footprints), providing scores that differ from agency-to-agency and reassigning improved ratings without much basis are just few of the things that has led investors to question their reliability. Let’s take MSCI for instance. In this short video below, Cam Simpson describes what is actually measured through their basis and scoring methodologies-
...What is the impact of the world - climate change, water shortages - potentially on the company
The impact of the world on the company and not the impact of the company on the world. Here is a short video where Bloomberg’s investigative and climate reporters Cam Simpson, Akshat Rathi and Saijel Kishan have done a phenomenal job uncovering some very important information on what goes behind the ratings.
The Solution
Now, before you feel you can’t trust anything anymore, there is already a startup working to disrupt this industry by doing what was actually needed to be done in the first place. Measuring the impact of the company on the world. Impaakt, a Swiss startup, uses the power of collective intelligence to score a company against the UN Sustainable Developments Goals (SDGs). Thousands of raters across the world rate company analyses across the value (positive or negative) and the scale (breadth, depth and persistence) of the impact thus removing the bias factor that a small group of people may have or create.
The Stats
It is a powerhouse of information with over 25,000 analysis covering over 3,500 companies across 57 countries. 500 fully trained analysts from all over the world research companies to bring insightful information about numerous topics to the platform. Here, 50,000 raters then assess and rate them based on certain criterions. A score is developed for the company using Impaakt’s scoring methodology. The scores range from -5 to +5 for the negative or positive impact a company is creating and from 1 to 1000 for how big or small this impact is on the world.
The Difference
What makes Impaakt different from other rating agencies is that it has a very stakeholder based approach. For users of the data – investors, employees and consumers – transparency of scoring methodologies is maintained at all times. You can check their data in action here -Global Impact Rankings 2022. No scope for greenwashing, not by Impaakt or by any of the companies it covers because the their impact is being measured in real-time. Analysts and raters are constantly involved in the development of the platform and ideas from everybody are encouraged. Raters are provided with webinars and guides to maintain the standards of ratings and frequent discussions are held to further enhance the assessment process. Collaboration and Collective Intelligence are at the centre of focus here.
How the Impaakt platform benefits various stakeholders
We will divide the stakeholders into three groups – A) The Users B) The Contributors and C) Others to see how each one benefits from this platform.
A) The Users
The main users comprise of wealth managers, reinsurance companies, large European and Swiss Universal Banks, private banks, impact investment boutiques, and several of the top 10 asset managers of the world. Collectively, Impaakt serves clients having over € 6 trillion in assets under management. Since the impact of a company is presented as-it-is, investors can rely on the scores as a guide towards shifting capital to companies having a positive impact on the planet. In addition to these, a small percentage of users also make up employees and consumers. While employees can gain a deeper perspective of the companies they work for or are considering working for, consumers can learn about better alternatives available in the market and make eco-friendly purchase decisions. An article published by Bloomberg shows how a rising number of people are quitting their jobs for careers combating climate change as workers become more aware of the impact their companies have. Meet – The Climate Quitters.
B) The Contributors
The contributors to this platform mainly include the analysts and the raters. The analysts are given a rigorous training and the ones that are selected have passed a 0.5% selection criteria. They develop enhanced research skills, understand the process of filtering data and present unbiased information. The raters on the other hand need to pass a series of assessments, which includes a mandatory exam and a rating round. As a rater, they gain evaluative reasoning skills which is a credible skill to have in any domain. Additionally, they are exposed to a wide variety of topics and can deepen their knowledge in any that interests them. Students looking to build a career in sustainability (ESG, Sustainable finance, Impact assessment, green technologies etc.) or professionals already working in this field can learn a whole lot while also gaining tangible skills.
Also read – Why you Should Consider a Career in Sustainability
C) Others
These include the company that is being scored on and other businesses. Through the various topics covered, companies can gauge where improvements are needed. The scores also provide insights on things that management may not have given previous thoughts to. Businesses, on the other hand, can learn from already existing practices used by other companies. Startups and small businesses can also learn about the technologies or services available in the market currently (or the lack of) and build on them.
Action Items
Are you an investor wanting to see Impaakt data in action? Check out their Impact Data Solutions.
Are you someone who wants to contribute to the platform? Head here – Become a Certified Impact Rater and Join the Impaakt Community
Are you looking to learn about various companies’ impact? – Head here – Company Impact Scores
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