The role of ESG ratings The emergence ESG ratings are of specialist providers used in various ways: Once investors have decided to incorporate ESG • They may be used to screen potential investments, and considerations into their investment process, how do they can be integrated into investment decision processes and proceed? The systematic consideration of a catalogue portfolio analysis. of environmental, social and governance issues for every • They form the basis for the design of benchmark indices company in the investment universe is complex. in both equity and debt markets (e.g., Bloomberg One approach is to leave the process to asset managers Barclays MSCI sustainability indices). that specialise in ESG investing. Another is to structure • They can be used in the design of ESG-targeted a mandate more formally, with quantitative metrics to investment products and strategies (e.g., thematic express the investment goals and constraints. An ESG- investing such as low carbon or ethical mandates). specific benchmark could be specified rather than a more traditional one. In any case, the asset manager will need to • Some ESG rating companies have also expanded report periodically to the asset owner on how the portfolio coverage to sovereign issuers and to investment is positioned relative to ESG issues. For all of the above, funds, in addition to individual corporations. In a asset managers and asset owners often rely on third-party recent development, Morningstar (in partnership with ESG ratings, in the same way that credit ratings from rating Sustainalytics) and MSCI have both started providing ESG agencies are pivotal to bond portfolios. rankings of mutual funds, based on aggregated scores of Several ESG service providers have emerged in the past two the companies comprising each fund’s holdings. decades dedicated to helping investors identify companies According to an annual industry survey by Independent that follow better and worse practices in different ESG Research in Responsible Investment, the top two providers areas. This relatively new industry is still fragmented of independent ESG research and rankings are MSCI ESG by product area and geography, but it is experiencing Research and Sustainalytics. Another important provider, consolidation. Only a handful of providers claim to offer Institutional Shareholder Services (ISS) has a 30-year comprehensive coverage across all three dimensions history of focusing on corporate governance issues, with of Environment, Social and Governance, and across expertise in law, accounting and compensation. ISS was geographies. In addition to specialist providers, large data part of MSCI until it was spun off in 2014, and only recently 18 and FTSE19 are also entering vendors such as Bloomberg expanded its services to cover a full range of ESG issues. this market. “While there are similarities, each 18 See http://www.bloomberg.com/professional/equities/ provider of independent ESG research 19 See http://www.ftse.com/products/indices/F4G-ESG-Ratings?_ga=1.14814 and ratings has its own methodology” 6999.1608349752.1470651995 20