ESG Ratings Explained: Analysis of ESG Leadership positions across German CDP A-list companies

‍ESG ratings measure a company’s environmental impact, social responsibility, and governance practices. Investors and stakeholders use these ratings to assess sustainability and ethical risks. In this article, we’ll explore what ESG ratings are, their significance, and how they influence both companies and investors.

Introductory points

• Companies are scored by ESG rating agencies on a range of factors, with better scores typically opening up higher access to capital opportunities (e.g. being listed on S&P's DJSI).
• CDP is a climate-focused annual ESG questionnaire and getting to the A-list is extremely difficult; out of 22,400 companies to respond, only 2% achieved an A grade.
• This article will explore whether leadership in CDP is reflected across other ESG ratings, particularly "passive" ESG ratings.

How are we defining ESG Leadership positions?

CDP: We only chose German companies who score the highest grade in CDP (A), which puts them in the 2% of companies (out of 22,400) to reach the top mark. The companies selected make up the entirety of German A-list responders. It's important to note that CDP primarily only scores companies on the Environmental aspect of ESG, with some Governance factors considered, whereas the other standards/ratings below assess companies across ESG factors. Companies are assessed on the following grade scale: D, C-, C, B-, B, A-, A.

CSRD (ESRS): This is an EU regulatory framework, companies are not given a score. However, German companies are not (yet) mandated to report on this, as it was not transposed from EU law to German law. Corporates who are publishing ESRS disclosures voluntarily generally signify that they have significant EU operations that, should it become mandatory for them, they would be in scope to report. Publishing before it becomes mandatory also shows they have the data to comply, and signal to investors their confidence in being able to publish complex, transparent & comparable data.

MSCI: Leadership is defined by MSCI itself as companies who score an AA or AAA. This makes them a leader in their industry. Companies are assessed on the following grade scale (worst to best): CCC, B, BB, BBB, A, AA, AAA.

Sustainalytics: We have designated a Sustainalytics leader where that company is in the top 20% of company ESG ratings within their industry. Companies are assessed on the following grade scale: 40+ (severe risk), 30-40 (high risk), 20-30, (medium risk), 10-20 (low risk), 0-10 (negligible risk).

ISS: ISS also defines leadership itself where it lists a company as Prime, meaning they are one of the top companies in their industry. ISS also incorporates a grade scale which indicates what the highest marks are in that industry, i.e. if a company is Prime but only has a C, it means it's very hard to get above C in that industry. Companies are assessed on the following grade scale: D-, D, D+, C-, C, C+, B-, B, B+, A-, A, A+.

S&P (DJSI): S&P uses a combination of passive scoring on public data and also gives companies the option to complete the Corporate Sustainability Assessment (CSA) questionnaire. While completing the CSA doesn't guarantee becoming a leader, companies who do well in the CSA increase the likelihood of being included in Dow Jones Sustainability Indices (DJSI), which can open up significant ESG investment opportunities. Companies are assessed on a 0-100 grade scale.

What Are ESG Ratings?

ESG ratings measure a company’s sustainability and ethical impact as well as potential investment risk based on ESG factors. They evaluate performance across environment, social, and governance metrics. ESG ratings inform market participants about performance and risks related to environmental, social, and governance factors and are often rated based on these criteria.

ESG scores drive sustainable investing growth and create long-term value for stakeholders. Companies use ESG ratings to identify risks, find investment opportunities, and benchmark performance against competitors. Investors rely on these ratings to shape sustainable investment strategies, considering associated risks and impacts. The ESG score is an important factor in this process.

ESG rating agencies see ESG as the impact of environmental and social risks on financial performance. This ensures ESG ratings are financially relevant, not just measures of corporate responsibility.

Demand for ESG information has surged due to growing interest in corporate responsibility, sustainability, and impact investing. As stakeholders recognize ESG’s importance, the relevance of ESG ratings grows, making them indispensable for companies and investors alike.

Key Components of ESG Ratings

ESG ratings consist of three main components: Environmental, Social, and Governance. Each component offers insights into different aspects of a company’s performance and risk, including ESG factors:

• The Environmental component measures a company’s impact on the planet, including carbon footprint, resource usage, climate risks mitigation efforts, and the company’s esg performance.
• The Social component examines relationships with employees, customers, suppliers, and the broader community. This includes labor practices, human rights, and community engagement.
• The Governance component looks at management quality, governance quality, board structure, shareholder rights, and transparency.

Weights assigned to Environmental and Social categories in ESG scores vary by industry. Industries with significant environmental impacts, like energy and manufacturing, may have higher weights for the Environmental component. Service-oriented industries may emphasize Social and Governance factors more.

Each ESG rating agency develops its own scoring methodology, evaluating various factors within a company’s material ESG issues. These methodologies consider geographical and industrial risk factors, and a company’s performance relative to industry peers. This ensures a comprehensive and tailored assessment of ESG risks and opportunities.

Sustainability data and financially material ESG scores are crucial in determining financially material ESG scores. High ESG scores show a company’s ability to manage ESG risks effectively and capitalize on ESG opportunities. Initiatives like reducing toxic emissions or improving labor practices can significantly enhance a company’s ESG quality and performance.

Active vs. Passive ESG Reporting

It's important to distinguish here between how a company reports its data and how ESG rating agencies assess their performance.

Active and Passive ESG reporting are two distinct approaches to assessing a company’s ESG performance.

• Active disclosures are published by companies in annual reports, on websites, or through questionnaires submitted to ESG standard setters and rating agencies. Examples include the Corporate Sustainability Reporting Directive (CSRD), Global Reporting Initiative (GRI), and Sustainability Accounting Standards Board (SASB) reports.
• In contrast, passive disclosures are outside a company’s control. ESG rating agencies assess companies using already published, public data. Leading agencies like MSCI, Sustainalytics, and ISS rely on passive disclosures to evaluate ESG performance. This ensures ratings are based on publicly available information, providing an unbiased assessment of ESG quality.

In summary, active ESG disclosures include frameworks like CDP, CSRD, and the Corporate Sustainability Assessment (CSA) by S&P. Passive ESG ratings are provided by agencies like MSCI, ISS, Sustainalytics, and also S&P. Companies don’t have to complete the S&P CSA to get a rating, but it is necessary to be listed on the Dow Jones Sustainability Index (DJSI).

Assessing ESG performance per company

ESG Ratings are either published publicly or via corporate disclosure. For each company, we will show where publicly available:

• CSRD: Linked report
• MSCI: Public disclosure by the company (not publicly available from MSCI)
• Sustainalytics: scores searchable here
• ISS: scores searchable here
• S&P CSA: scores searchable here

BMW

Bayerische Motoren Werke AG (BMW) is a popular car manufacturer based in Munich, Germany.

• CSRD report
• Sustainalytics: 23.8
• ISS: C+
• S&P: 47

Beiersdorf AG

Beiersdorf AG manufactures personal-care products and pressure-sensitive adhesives headquartered in Hamburg, Germany.

• MSCI: AA
• Sustainalytics: 27.0
• ISS: C+
• S&P: 42

Deutsche Bahn AG

Deutsche Bahn AG is the national railway company of Germany, and a state-owned enterprise under the control of the German government. Headquartered in Berlin, it is a joint-stock company.

• MSCI: A
• Sustainalytics: 22.0
• ISS: B-
• S&P: Private

Deutsche Telekom AG

Deutsche Telekom AG is a partially state-owned German telecommunications company headquartered in Bonn, Germany.

• CSRD report
• Sustainalytics: 19.3
• ISS: B
• S&P: 88

DMG Mori AG

DMG Mori Aktiengesellschaft is one of Germany's largest manufacturers of cutting machine tools and a manufacturer of CNC-controlled lathes and milling machines, headquarted in Bielefeld, Germany.

• Sustainalytics: 29.2
• ISS: C
• S&P: Private

Robert Bosch GmbH

Robert Bosch GmbH, commonly known as Bosch, is a German multinational engineering and technology company headquartered in Baden-Württemberg, Germany.

• Sustainalytics: 15.5
• ISS: B-
• S&P: Not rated

TK Elevator AG

TK Elevator manufactures and maintains elevators and escalators headquartered in Dusseldorf, Germany. It is formerly part of ThyssenKrupp AG, but was sold as a standalone entity in 2020.

• Sustainalytics: 13.9
• ISS: No rating
• S&P: Private

TUI AG

TUI AG is a German multinational leisure, travel and tourism company headquartered in Hanover, Germany.

• Sustainalytics: 26.5
• ISS: C+
• S&P: 54

thyssenkrupp AG

thyssenKrupp AG is a German industrial engineering and steel production multinational conglomerate headquarters in Duisburg and Essen.

• MSCI: A
• Sustainalytics: 25.6
• ISS: C
• S&P: 45

Summary of learnings

• Deutsche Telekom exhibits the most leadership qualities of any German CDP A-lister, given that they disclose on CSRD and are a leader in every rating aside from MSCI.
• MSCI is the outlier in no longer publishing public scores. Companies may therefore publish at their own discretion. Leaders (i.e. AA or AAA), or perhaps those who have held Leadership positions in the past and want to remain transparent, are the most likely to publish their MSCI rating.
• CSRD is not having a severe impact on ratings as German companies are not risking non-compliance as things stand. Only 2 of the approximately 61 German companies to publish CSRD have received an A from CDP (although perhaps not all of them participated in CDP).
• Leaders in CDP are usually leaders elsewhere too. With the exception of DMG Mori, every German A-list is considered a leader by at least one other ESG rating agency.

Support for CDP & ESG Ratings

Nossa Data is a CDP Accredited Solution provider and API partner, supporting efficient end-to-end disclosures to CDP. Through Nossa Data's ESG disclosure management tool, companies can optimise their disclosures for AI to both align their data between various frameworks and ensure they are getting their data picked up by the ESG rating agencies which matter to them.

Schedule a demo here if you'd like to learn more.

Frequently Asked Questions

What are ESG ratings?

ESG ratings are assessments that gauge a company's performance across environmental, social, and governance criteria, providing insight into its sustainability and ethical impact. These ratings serve as a tool for investors and stakeholders to make informed decisions.

How do ESG ratings help investors?

ESG ratings are essential for investors as they guide sustainable investment strategies and assist in managing environmental, social, and governance risks effectively. This enables investors to make informed decisions aligned with their values and financial goals.

What are the main components of ESG ratings?

The main components of ESG ratings are Environmental, Social, and Governance factors, which evaluate a company's impact and sustainability practices. These components provide insights into a company's long-term viability and ethical performance.

What is the difference between active and passive ESG reporting?

Active ESG reporting consists of direct disclosures from companies about their environmental, social, and governance practices, whereas passive reporting relies on assessments of publicly available data conducted by rating agencies.

Why is there a growing interest in ESG information?

The growing interest in ESG information stems from a heightened focus on corporate responsibility, sustainability, and impact investing, reflecting a broader trend towards responsible business practices. This shift underscores the importance of accountability and transparency in today’s market.

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