The Environmental, Social, and Governance (ESG) data landscape is evolving as ESG ratings transition away from traditional, aggregated scores that rely primarily on self-reported data. This shift is driven by the demand for more precise, transparent metrics that provide stakeholders with deeper insights and effectively address increasing regulatory scrutiny. This evolution enhances the reliability of ESG assessments, ensuring they more accurately reflect company practices and performance.
Challenges in ESG Rating Systems
Traditional ESG ratings have relied on company disclosures and questionnaires, with publicly listed companies spending between USD 220,000 and USD 480,000 annually, and private companies up to USD 425,000.¹ Despite these costs, many companies are dissatisfied with the accuracy and transparency of traditional ratings. Self-reported, aggregated scores often obscure critical financial and reputational risks. While companies highlight positive actions like board diversity and waste reduction, composite scores can mask significant operational and supply chain risks, pushing stakeholders to demand more granular data for a clearer view of ESG performance.
Regulatory pressures, including frameworks like the Taskforce on Nature-related Financial Disclosures (TNFD) and the Corporate Sustainability Due Diligence Directive (CSDDD), underscore the need for detailed ESG scores. These regulations demand precise insights to hold companies accountable and provide metrics that clearly reflect corporate risks.
Additionally, there is a rising demand for independent ESG risk data, which is essential for assessing and managing risks tied to specific business practices and ESG factors.
The Power of Disaggregated ESG Scores
Disaggregated ESG scores offer a detailed view of company performance across various ESG factors. By examining individual components, stakeholders can identify where a company faces more or less risk, allowing them to assess what matters most based on their business goals, policies, and values. This approach ensures decision-makers have the data needed to comply with regulations and understand impacts on people and the planet.
Risks vary depending on the sector. For instance, in the global oil and gas industry, disaggregated scores provide a clearer risk profile. The sector's environmental impacts make biodiversity a priority. Disaggregated scores expose specific risks related to local pollution, protected areas, land ecosystems, waste management, and endangered species. Moreover, global operations expose oil and gas companies to regions with diverse human rights records. Disaggregated scores highlight risks like corporate complicity, land grabbing, indigenous rights, and forced labor.
Due Diligence and Compliance for Every Business, Every Sector
Disaggregated scores enable due diligence and compliance processes to effectively flag investments, customers, or suppliers at risk of violating business conduct norms, regulations, or internal policies. This approach is particularly useful for:
Companies: Ensures compliance with business conduct standards and regulations, promoting ethical practices and minimizing compliance risks.
Banks and Insurance Companies: Enhances Know Your Client (KYC) and transaction due diligence, reducing financial and reputational risks.
Asset Managers, Asset Owners, and Index Providers: Strengthens norms-based screening for private equity and debt, aligning investments with ethical standards.
Conclusion
The shift in ESG ratings toward disaggregated metrics marks a new era of precision and transparency. By highlighting risks where they matter most, disaggregated scores improve due diligence and compliance, offering stakeholders the clarity they need to protect investments and maintain strong business relationships. This evolution not only builds trust but also drives progress in corporate responsibility and sustainability. The future of ESG lies in the precision and transparency offered by disaggregated scores, which are essential for effective risk management and informed decision-making.
For an in-depth look at the value of disaggregated scores, refer to the full RepRisk report: The evolution of ESG data: disaggregated scores for precision and transparency.
By Reuters / March 27, 2023
Author:
Laura Zamarian - Marketing Business Development Manager
Email: laura.zamarian@reprisk.com
About RepRisk:
RepRisk is a global leader in identifying and assessing business conduct and ESG risks for organizations worldwide. Using artificial and human intelligence, RepRisk focuses on what companies may not disclose, uncovering risks such as deforestation, human rights abuses, and corruption – empowering clients to identify and manage risks faster and with confidence.
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