Increasing importance of rating and ESG indicators

 

ESG aspects are becoming one of the priorities of investors as well as banks. Because of this, today’s entrepreneurs are developing new business models in order to implement sustainability and gain a positive view of corporate social responsibility. The issue is being widely discussed – the 2nd ESG Poland Power of Business Congress has already taken place on 7 November. We explain where the growing importance of ratings and ESG indicators came from!

What are ESG indicators and ratings?

ESG is an acronym for the parameters that help to produce ratings (risk assessments) and non-financial assessments of companies, but also of institutions, organizations, states, etc. As the name suggests, they consist of issues related to:

• E – environment (climate issues and good environmental practices),
• S – social responsibility (equal treatment of employees and shareholders, taking into account their health and safety),
• G – corporate governance (innovation that uncovers different opportunities and creates more jobs).

Based on these, investors can compare different investment directions, with the possibility of comparing the available options on a single level.

Why are ESG indicators becoming increasingly important?

The outbreak of the COVID-19 pandemic put companies in virtually all industries to the test and shook the stability of the global economy. However, the research showed that companies taking ESG factors into account performed better in crisis management and were less affected by the consequences associated with current difficulties and new challenges. This was because the units were less exposed to disruptions related to, for example, technological constraints or the need to comply with new regulations. Data analysis minimises the impact of the crisis and speeds up the process of implementing solutions to rebuild losses and better cope with new conditions.

ESG parameters are also worth taking into account when making investment decisions, as in this way more long-term sustainability projects can be acquired, mobilising the capital needed to meet the Green Deal objectives, etc.

How are the ESG analyses performed?

ESG analysis is difficult because this type of data is not always available and, in addition, often only shows a historical perspective. As they tend to be qualitative in nature, it is also not possible to apply a standard approach to them, such as in the analysis of financial data. For this reason, more and more entities are using the services of rating agencies.

Investors want to invest their capital in the best possible way, which is why they are keen to finance companies that boast good ESG parameters. However, it is worth being aware of the fact that they do not treat them as a direct indicator. Rather, they are treated as a source of baseline data, which is the starting point for subsequent analyses from which, for example, KPIs (key performance indicators) are created.

What is interesting is that there is no one-size-fits-all methodology for analysing ESG data. Because of this it is possible that if you use several agencies, they may give different ratings for the same entity. Entrepreneurs often decide precisely to seek further ‘opinions’ in order to gain as much data as possible.

Why should you order an ESG rating?

Joining the ESG rating helps to improve a company’s image, putting it in a better light for shareholders, but also of course for investors, business partners and customers. As a result, a greater chance of new investment and a lower cost of capital are gained.

Support for strategic business decisions is also a very important issue. The analysis of ESG parameters allows you to run and develop your business in a fully informed manner, limiting the risk of loss and maximising the chances of earning.

Moreover, in recent years, consumers have also been incorporating ESG aspects into their choices. Growing public awareness of the need to care for the environment means that customers are increasingly examining the business models of companies and brands and are more likely to choose those that focus on ecology and sustainability.

iLabs - Kamil
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