Sustainability rating is good for your business
Businesses that are recognised as sustainable will not only be rewarded by their clients and society, but – just as importantly – also by the companies they supply, by investors and by lenders.
ING, for example, offers a Sustainability Improvement Loan that offers better terms to corporates that are more sustainable. Food giant Nestle engages with its farm suppliers in the UK, carrying out impact assessments that help them to develop more sustainable farming methods and reduce environmental impacts such as soil degradation.
A growing number of the world’s largest companies – such as Walmart, Unilever and Tesco – impose sustainability standards on their suppliers so if you want to win business from them, a sustainability strategy is essential. In a study by Stanford University, more than half of the companies surveyed have some kind of sustainable sourcing policy – and many of them use third-party certifiers to rate their suppliers and ensure their standards are met.
Handling ESG issues well is often a sign of operational excellence at a company, as EY points out, and there is a growing awareness that generating sustainable returns over time requires a sharper focus on ESG factors. Boston Consulting Group analysed more than 300 leading pharmaceutical, consumer goods, oil and gas, banking and tech companies and found that those with strong ESG performance had a higher market capitalisation and made bigger profits than their rivals.
But you cannot just announce you are sustainable. Stakeholders need to have confidence that this is the case, while companies trying to improve their sustainability performance need to have some way to measure their progress. This is where ESG ratings come in.
To meet the growing investor demand for ESG information, there is a range of sustainability ratings on offer, particularly for listed companies, including the Dow Jones Sustainability Index and FTSE4Good. These supplement sustainability standards-setters such as CDP, the Global Reporting Initiative (GRI) and the United Nations’ Global Compact and the listing requirements on a growing number of stock exchanges, which call on companies to improve their performance on ESG issues.
There are also more focused rankings, such as KnowTheChain (which focuses on forced labour abuse in the supply chain), Ranking Digital Rights (which looks at policies around freedom of expression and privacy) and the Access to Nutrition Index, which ranks the 22 largest companies on their contributions to tackling obesity and under nutrition.
These ratings are often underpinned by research from external consultancies such as Sustainalytics, which assesses 8,400 publicly-listed companies and EcoVadis, which covers some 45,000 companies on its network.
Investors increasingly use ESG information to help them decide which companies to invest in. Bloomberg recently reported that the number of customers accessing ESG data on its terminals in 2017 increased 22% from the year before.
Benefits of a sustainability rating
A sustainability rating brings a number of benefits. To gain a rating, a business must be assessed for its performance on ESG issues, which gives increased insight into its operations, highlighting areas of potential material risks – physical, regulatory and reputational – that the company may not have considered. For example, mapping your water use can reveal your exposure to water-stressed areas. As the ongoing crisis in Cape Town has highlighted, drought in such areas can quickly lead to curtailment of supplies, stricter regulations on how much water you can use and competition with other businesses and domestic users for scarce supplies.
You can also uncover hidden social risks in the supply chain that can seriously damage your reputation – a number of companies in the apparel sector have been caught out by revelations that their suppliers (or, more often, the companies that supply their suppliers) use child labour or have poor labour practices, leading to severe reputational damage. The increased supply chain transparency that a rating provides can help companies avoid such damaging revelations.
The information uncovered by the rating process can help address current ESG challenges, make companies more efficient and resilient, and future-proof them against future ESG risks and the regulation that will be introduced to deal with them. For example, the Paris Agreement on climate change has led the UK to announce plans to review its emissions reduction targets, which could increase restrictions on many sectors, ranging from electricity generation to car making and cement. Other countries are likely to follow suit.
The rating process can also identify new opportunities to change the way you do business or to create new products and services. Carmakers are in the process of switching their portfolios from petroleum-powered to electric vehicles, while power producers are embracing solar and wind energy and virtually all companies are working to remove plastics from their supply chains.
A strong rating can make it easier and cheaper for firms to access capital and increase their share price. It can also boost brand value by increasing employee and customer loyalty and encouraging sound risk management, efficient use of resources and a clear corporate strategy.
If you score well on the rating, it provides a boost to your reputation and, according to the MIT Sloan Management Review, “companies that demonstrate ESG leadership can expect to be rewarded with lower-cost capital,” as in the case of ING’s Sustainability Improvement Loan. Investors and bankers don’t like funding companies without knowing all the risks – and ESG ratings highlight risks, from human rights to water availability, that are not revealed by traditional financial analysis, which often takes a short-term focus that ignores many longer-term risks to the financial health of a company.
And if the rating shows there is room for improvement, it also provides a clear pathway for companies to lift their performance, while giving shareholders a basis on which to engage with the company in order to seek those improvements.
One of the key features of rating an individual company is a comparison of how it is performing relative to its peers, enabling investors to gain an insight into which businesses are performing best. There may also be a historical assessment of how the company’s approach to ESG risks has changed over time.
Listed companies are assessed using a combination of publicly-available data and questionnaires. Smaller companies need to take action themselves to get rated. Until now, they have had little incentive to do so, however,ING aims to change that.
Becoming more sustainable is not just a good idea because it carries significant business benefits. A strong sustainability rating may be highly valued by stakeholders and customers, however, boosting your brand should not be your only motivation. Becoming more sustainable is simply the right thing to do, for people and planet, as well as profits.
Interested to learn how your commitment to sustainability can be rewarded?Find out how