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Spotlight on ESG Ratings and Rankings

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Rapidly evolving ESG data and tools can help you meet your investment and sustainability goals.

Investors are increasingly interested in companies’ performance on environmental, social and governance (ESG) issues such as carbon emissions, workforce diversity and data security. All that interest — and the investor activism, proxy voting and regulation that have accompanied it — have motivated companies to report on ESG performance in addition to their traditional shareholder reports and disclosures. More than 90% of S&P 500 companies issued sustainability reports in 2020, up from 20% in 2012.1

Many policymakers, regulators and nonprofits have responded to the rise of ESG investing by creating a collection of standards for companies that report on ESG. These standards can make it easier for investors to compare ESG performance across companies and industries. In addition, certain financial research firms now use companies’ reported data to rate individual companies on ESG performance, much like credit agencies use companies’ balance sheets and risk exposures to create credit ratings.

With the rise of robust, standardized ESG data and analysis, your financial advisor can provide greater insight into your portfolio’s ESG profile and explore ways you might make your investments more consistent with your goals.

“If you have an ESG preference, our job is to link it to fulfillment solutions,” says Peter Mladina, director of portfolio research at Northern Trust Wealth Management.

ESG Reporting and Rankings

ESG reporting

Companies structure their ESG disclosures according to specific industry standards that are designed to make reporting more transparent, consistent and useful for investors and other stakeholders. These standards are developed and maintained by nonprofit organizations, including:

  • Global Reporting Initiative (GRI). This independent international organization provides a comprehensive framework for reporting environmental, social and governance issues to all stakeholders. The GRI Standards are designed to be easy to use and modular, giving a wide range of companies and other organizations a straightforward, credible way to understand and report their impact on people, the environment and the economy.
  • Sustainability Accounting Standards Board (SASB). SASB maintains standards for corporate sustainability reporting tailored to 77 different industries. With investors as primary audiences, the SASB standards focus companies’ sustainability reporting on metrics that are most financially material to business performance in their industry, helping investors analyze ESG performance across the economy.
  • Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD framework provides a thorough, consistent structure that companies can use when disclosing climate-related financial disclosures for investors, lenders and insurers. It was designed to help a company’s stakeholders better assess how climate change might affect its financial risks and opportunities. The framework was created by the Financial Stability Board, an international organization that helps national financial authorities maintain a strong global financial system.

ESG ratings

Your advisor may use ratings from Morgan Stanley Capital International (MSCI) to judge how well a given company or investment strategy performs on various ESG metrics. MSCI’s ratings attempt to quantify how well companies manage financially material ESG risks and opportunities. The firm uses its analysis to assign companies letter grades that convey whether they lead or lag on their management of a variety of ESG-related risks: AAA and AA ratings indicate ESG leaders; A, BBB and BB ratings indicate average performers; and B and CCC ratings indicate laggards. MSCI also applies ESG grades to funds, fixed-income securities and countries. MSCI ESG Research covers over 8,500 companies globally.

How to Interpret ESG Reporting Data and Ratings

A wide variety of tools can help you achieve your sustainable investing goals. The information they provide can help you and your advisors build and maintain a portfolio that is consistent with your objectives — whether the goal is to avoid companies you consider objectionable, to manage risks related to ESG factors or to try to use the portfolio to support companies making progress on ESG-related topics that are important to you.

Northern Trust uses MSCI ESG Research to seek to identify the best ESG strategies. MSCI provides investors with a broad set of fund-level and company specific ESG data points, ESG ratings, ESG controversy monitoring data, and business involvement tools. These may focus on particular sustainable investing elements, such as carbon emissions, labor practices or gender diversity.

Our ESG analysis also helps demonstrate how adjustments to your investments would affect exposure to specific ESG criteria. For example, you may want to emphasize the most environmentally or socially responsible corporations in your portfolio without meaningfully altering your diversification. To pursue those goals, your advisor may recommend using a best-in-class approach2 that emphasizes companies with leading ESG practices in their industries. Using the ESG Portfolio Report, they can show how implementing that approach would affect your portfolio’s ESG profile and investment characteristics, such as expected risk and return.

 “The most important thing is for you to understand any tradeoffs you’re making,” says Mladina. “Your advisor can lay it all out for you.”

If you decide to modify your portfolio, make a plan to evolve it over time. The plan should plot out ways to increase its alignment with your ESG goals while keeping in mind practical considerations, such as the tax consequences of sales.

Northern Trust is here to help you reach your investment goals. If your objectives include integrating ESG considerations in your portfolio, using your investment capital to express your values or managing your ESG risk exposures, talk with your financial advisor. ESG ratings and rankings now give them powerful tools that can provide a more holistic view of risks and opportunities — resulting in better-informed investments and helping you align your investments with your beliefs.

 

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1. Governance & Accountability Institute, Inc. https://www.globenewswire.com/news-release/2021/11/16/2335435/0/en/92-of-S-P-500-Companies-and-70-of-Russell-1000-Companies-Published-Sustainability-Reports-in-2020-G-A-Institute-Research-Shows.html

2. Best-in-class ESG is industry terminology referring to an investment approach that selects companies that are leaders in implementing ESG.

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Disclosures

This document is a general communication being provided for informational and educational purposes only and is not meant to be taken as investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions or inflation. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein.

LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Periods greater than one year are annualized except where indicated. Returns of the indexes also do not typically reflect the deduction of investment management fees, trading costs or other expenses. It is not possible to invest directly in an index. Indexes are the property of their respective owners, all rights reserved.

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