Use of ESG ratings by non-financial stakeholders

An expanding group of stakeholders are interested in understanding the ESG status and sustainability of those businesses they engage with – both directly and indirectly. ESG disclosures by independent rating agencies augment the statements and action plans of an organisation to add depth, perspective and more importantly, an independent view of the organisation’s stated aims.

Some of these are recognised as being difficult to assess but nonetheless attempts must be made to do so. There is growing recognition that for many businesses, their greenhouse gas emissions (GHG) are dominated by their Scope 3 emissions. Scope 3 GHG emissions encompass those that are not produced by the company itself and are not the result of activities from assets owned or controlled by them; rather they are by organisations that it is indirectly responsible for up and down its value chain. This includes purchased goods and services, business travel, employee commuting, waste disposal, transportation and distribution, and leased assets and franchises.

Examples include:

• Customers are the lifeblood of any business. ESG factors that are relevant include the company’s environmental impact, its labour practices, and its commitment to social responsibility

• Suppliers provide the company with the goods and services it needs to operate. ESG factors that are relevant include the company’s commitment to ethical sourcing and its environmental impact

• Existing and potential employees are increasingly interested in the sustainability and ESG credentials of their employers. ESG factors that are relevant to employees include the company’s commitment to diversity and inclusion, its compensation and benefits packages, and its safety record.

According to a survey of global consumers in January 2021 by the IBM Institute for Business Value, the need for greater flexibility (32%) was the top reason workers changed jobs in 2020 – followed closely by the desire to find more purposeful, meaningful work (27%). 1 in 4 said they were looking for work that better fit their values—the same portion who said they were looking for a salary increase or promotion. Companies focused on sustainability and social responsibility are therefore well-positioned to attract these purpose-driven potential employees.

A follow-up survey found that 69% of the full potential workforce, (which includes people who are employed full or part-time, unemployed and seeking employment, or full-time students or apprentices), were more likely to accept a job with an organisation they considered to be environmentally sustainable. Additionally, 70% of workers said they were more likely to stay with an employer that had a good reputation on environmental sustainability while 75% of employees said they expected their employers to take action on social responsibility issues.

• Local communities are where the company operates. ESG factors include the company’s environmental impact, its commitment to giving back to the community, and its support for local businesses

• Governments regulate businesses and set the rules of the game. They can also be important customers or suppliers. ESG factors include the company’s compliance with regulations, its tax payments, and its commitment to responsible business practices

• Non-governmental organisations (NGOs) work to protect the environment, promote social justice, and advocate for human rights. They can be important allies or critics of businesses. ESG factors include the company’s commitment to sustainability, its labour practices, and its environmental impact.

Responsibilities extend beyond climate change. The introduction of the Modern Anti-Slavery Act in 2015 in the UK includes a provision for large businesses to publicly state each year the action they have taken to ensure their supply chains, in respect of the provision of goods and services, are slavery free.

As we can see there is a wide range of different types of stakeholders that are increasingly interested in the sustainability credentials of the organisations they engage with. And this interest will only increase.

Reports and analyses from credit rating agencies (CRAs) provide a rich source of independent information that is used to supplement the communications that organisations publish themselves. One of the key benefits of the CRAs is that by employing the same methodology across different organisations, in certain areas, it is possible to compare two businesses offering similar goods and services. By looking through environment, social and governance lenses, it is possible to identify those organisations that are likely to continue to operate in years to come, be capable of attracting and retaining quality staff and be able to provide data on their ESG footprint for reporting purposes.