Part 5.2 - Opinions of companies assessed

EC research brief

The study will explore the relationship between assessed companies and the providers of sustainability-related products and services.

The contractor is expected to explore views of companies on:

  • whether the sustainability-related products/services correctly reflect the sustainability performance of the company;
  • whether the sustainability-related products/services such as ESG ratings or scores, are a good way to assess/measure sustainability performance, or whether there are other ways;
  • the type of interactions companies and sustainability products/services providers have (e.g. regular meetings, commercial relationships, paid vs unpaid services, etc.), their frequency, and nature and at which stages of the rating process issuers are consulted and under which form (e.g. questionnaires, meetings, interviews, workshops, );
  • whether they can correct what they identify as mistakes/errors in the report or appeal the rating which is given to them;
  • whether and to what extent they think that the assessment influences their decision and approach towards the management of their sustainability risks and opportunities. The contractor shall provide some concrete examples following interviews and exchanges with

The study will also analyse the costs for companies, and costs relative to their size, of replying to multiple individual requests for information (i.e. questionnaires, surveys), and costs for rated companies of getting feedback from sustainability-related products / services providers.

Do companies believe that sustainable investment data, ratings and research effectively reflect the sustainability performance of their company?  Do other systems / approaches do this any better?

  • EC interest: “The study will explore … whether the sustainability-related products/services correctly reflect the sustainability performance of the company; and whether the sustainability-related products/services such as ESG ratings or scores, are a good way to assess/measure sustainability performance, or whether there are other ways;”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We have some questions for companies about whether the sustainable investment research process effectively captures their exposures to and management of sustainability issues.  We explore what is most effective and what is most frustrating and whether alternatives exist to the current process.

What we (think we) already know => Context

As previously discussed, no independent objective benchmark of sustainability exists or will ever realistically exist.  Therefore, in our assessment of “whether the sustainability-related products/services correctly reflect the sustainability performance of the company”, we have to rely on stakeholder views.  Of all stakeholders in the process, the listed companies being assessed have most reason for bias.  However, this is not to say that, just because companies have a motive towards bias, it inevitably means that they behave in a biased way.

Companies’ frustrations with the sustainable investment data, ratings and research process can be categorized into four areas:

  • Analytical competence
    • Lack of contextual understanding by the analysts who make ratings judgements
  • Research quality
    • The ‘black box’ nature of the process deployed to generate ratings
    • Inaccuracies in the data presented
  • Resource requirement
    • The time demanded to participate in the process
  • Accuracy
    • Sometimes, of course, companies are frustrated by research and ratings because those research and ratings perfectly assess and communicate corporate sustainability exposure and weak management practices

In questioning companies, we will explore all of these areas and try to understand which aspects of the sustainable investment research process are valued by companies and which are dismissed.

What interactions do companies have with sustainable investment data, ratings and research providers?  How much does it cost companies to participate in ratings?

  • EC interest: “The study will explore … the type of interactions companies and sustainability products/services providers have (e.g. regular meetings, commercial relationships, paid vs unpaid services, etc.), their frequency, and nature and at which stages of the rating process issuers are consulted and under which form (e.g. questionnaires, meetings, interviews, workshops, etc.). The study will also analyse the costs for companies, and costs relative to their size, of replying to multiple individual requests for information (i.e. questionnaires, surveys), and costs for rated companies of getting feedback from sustainability-related products / services providers.”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We have a number of questions for listed companies about:

  • How much time they spent engaging with SRI analysts and investors?
  • Which aspects of the communications are most / least useful?

We also have questions for research providers about the way that they interact with companies in their research and ratings-forming process.

What we (think we) already know => Context

From IRRI'19 Survey (Insight: Time spent on communications), we know that the way that companies spend time on sustainable investment communications differs widely and that it does not align with who they say their priority audiences are (Insight: Significant audiences).

There is also evidence (Insight: Managing contact) that they are not pro-actively prioritising and targeting sustainable investor and analyst audiences and also that they do not measure their SRI engagement effectively (Insight: Measuring the impact of communications).

Most significantly, there is widespread disagreement between companies and investors about how much contact is actually occurring.

In our research, we will endeavor to identify, explore and explain these differences in perception and to produce robust of what is actually happening ‘on the ground’.

Which sustainable investment data, ratings and research providers do companies consider it worth spending time on?

  • EC interest: Contextual
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We have a number of questions for companies about:

  • Whether they prioritise particular SRI research firms (of different types) over others?
  • Which ones these are?
  • Why they do this?

What we (think we) already know => Context

Equally, the IRRI'19 Survey offers information on which research providers companies consider to be priorities (Ranking: Best understanding of companies) and what good practice they value (Insight: Best practices by research providers - company view). Previous iterations of the Survey reveal the frustrations of companies, which fall into a number of predictable areas including:

 

  • Lack of two-way communication – no data verification or discussion with the company occurs before research is published
  • Poor responsiveness - to feedback and questions and to real changes in practices that are taking place inside companies

Analyst Coverage

  • Inconsistency of analyst coverage – there is a lack of experienced analysts who understand the material ESG issues affecting the company and who take time to examine changes in corporate strategy as they arise and interact with the company as necessary
  • Lack of engagement between companies and analysts - there is too much focus on publicly available data without liaising with companies as required if gaps appear including face to face meetings

Timing

  • Lack of time for companies to review ratings and provide adequate feedback
  • Inability to provide feedback on a draft report prior to publication with a reasonable timeframe to provide comments
  • Insufficient notice - sending out questionnaires and requests well in advance would be an improvement. Also, companies would find it useful to understand the research agencies’ rating timetable

Advice

  • Insufficient feedback - Companies would like practical and actionable recommendations and advice for improving how ratings can be improved or how information can be exchanged
  • Lack of comparability - Research providers could present findings on individual companies in relation to industry average results
  • Insufficient support - Ratings agencies could support and training to companies to better understand ESG issues and how they will affect business strategy and society in general
  • Insufficient guidance - Ratings agencies could provide guidance on best practice in disclosure and on how scores could be improved - including the promotion of best practice. They could also give further information on which investors use the data and how they use it
  • Inadequate context – ESG ratings could be supplemented with thematic research that contextualises the decisions taken within them

Methodology

  • Lack of transparency on methodology – research firms could communicate details about the assessment, like weightings of criteria, ranking of strengths and weaknesses.
  • One size fits all approach – whereas a bespoke approach would be more valued
  • Inefficiency of research and data collation processes – which could be enhanced by pre-completion of questionnaires with publicly available information to improve the work process and help companies identify shortcomings in their public reporting.
  • Backwards-looking – whereas forward looking ratings which are updated more frequently to reflect changes that are taking place within the companies would be appreciated - particularly when a controversy has arisen and been handled
  • Inefficient data input – the aggregation of existing corporate data into a downloadable form or interactive platform that companies can review, track changes, provide feedback, and see rationale behind acceptance/not acceptance of submitted information is recommended as helpful.

Materiality

  • Insufficient focus on materiality – a better understanding of materiality and the use of fewer, more material indicators would be appreciated

(How) can companies correct factual errors?

  • EC interest: “The study will explore … [whether companies can] correct what they identify as mistakes/errors in the report or appeal the rating which is given to them;”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We have questions for companies and ratings agencies about whether companies are allowed to see data and ratings before publication, whether they can correct or challenge data and ratings and what the process is for appeals is.

What we (think we) already know => Context

We have extensive evidence (from previous IRRI Surveys, Rate the Raters and personal experience) that:

  • research providers believe that they have processes in place that enable companies to update inaccurate information about them and that
  • companies do not consider these processes to be 'fit for purpose' and get very frustrated about poor ratings which they believe to be caused by inaccuracies in the data collection process
  • investors also report frustrations with the quality of data provided alongside ratings;

We will explore this problem with questions to both sides.

Is data quality the real problem?

We suspect, however, that the longevity of the question is due to the fact that there is some misdirection within it which will mean that the question cannot be satisfactorily resolved.  We suspect that companies are not actually that frustrated by inaccuracies in the recorded data; rather they are frustrated by the ‘ratings’ awarded.

Ratings may be inappropriately awarded (in the eye of the beholder) for one of four reasons:

  • Different perceptions of sustainability (rater and ratee may have different perceptions of what sustainability constitutes for the ratee’s business)
    • As discussed elsewhere, this is almost inevitable as there is no universally agreed definition
  • Different understanding of the rating’s objective
    • Again, this seems inevitable as the precise objective of ratings appears to be different and not well articulated
  • Inadequately considered context
    • Whereby the rater does not understand in sufficient detail the industry dynamics or the shape of the business being rated.
    • Rate the Raters shows this to be a significant factor
  • Inappropriate weightings
    • As weightings are assigned within the ‘black box’, this is often not visible to companies being rated
  • Inaccurate data
    • The matter under consideration here

Of these different factors, the first four are largely invisible to the company being rated.  Certainly, they cannot be understood without extensive research - such as we are currently conducting.

The accuracy of data is the only factor that is visible and possible to prove.  Accordingly, this is the one that attracts most criticism from companies and investors.  It would also be the easiest for a regulator to ‘fix’.  However, it should be recognized that data quality and the ability to correct data may be more of a symptom than a cause of frustration.

Is it appropriate for companies to be allowed to ‘correct’ data or ratings?

Also, in considering the question of factual error correction, we note that there is an important point of regulatory proprietary to be considered as follows:

  • There is an implication that ESG ratings agencies should allow companies to check, correct and challenge data, ratings and research
  • Sell-side analysts used to do the same with financial research. However, the system was abused (as companies exerted undue influence through ‘guidance’) and subsequently banned.

We have sought further guidance from the EC on their views in this respect.

To what extent do sustainable data, ratings and research affect the way that companies manage their sustainability exposures?

  • EC interest: “The study will explore … whether and to what extent the assessment by data ranking and research providers influences companies’ decision and approach towards the management of their sustainability risks and opportunities.”
  • Your view: Contribute information, ideas & your opinions: via this structured survey (most efficient) | This email address is being protected from spambots. You need JavaScript enabled to view it. (still pretty good) or | by emailing your thoughts to This email address is being protected from spambots. You need JavaScript enabled to view it. or This email address is being protected from spambots. You need JavaScript enabled to view it..

Outstanding questions

We have the following questions for companies:

  • What POSITIVE impact (if any) does the publication of sustainability data, ratings and research to investors have on your company’s approach to managing sustainability-related exposures and opportunities?
  • What NEGATIVE impact (if any) does the publication of sustainability data, ratings and research to investors have on your company’s approach to managing sustainability-related exposures and opportunities?
  • Which aspects of your interactions with the sustainable investment value chain (analysts or investors) have MOST impact on your management practices?
  • Which aspects of your interactions with the sustainable investment value chain (analysts or investors) have MOST impact on your management practices?
  • Which statement best reflects your opinion of investor influence on your approach to managing and communicating your approach to sustainability exposures and opportunities:

What we (think we) already know => Context

From our communication with companies, we believe that:

  • when companies are at an early stage in their engagement with sustainability issues, requests for sustainability-related information act as a force for improved engagement on sustainability issues within companies as they prompt basic management and reporting actions
  • as companies' approach to sustainability matures, these data requests burdensome as they become an end in themselves and can take resources away from delivering sustainability improvements within the company
  • finally, as companies' confidence in the sustainability agenda develops further and the company takes control of the agenda, they start to engage investors at a higher level and an improvement incentive is re-established

(Significantly, the impact that SIDRIRs have within companies depend to a large degree on the way that they are presented internally by CSR & IR managers)