EQUITA - 5 best practices for a successful ESG positioning

Improving the ESG rating can often prove a challenging task for corporates, amidst complex interactions with ESG rating providers and the request of an overwhelming variety of information and data. We have conducted an analysis of some successful examples of improving ESG ranking aiming at supporting corporates in their path towards a better ESG positioning by suggesting some best practices in the interaction with ESG rating providers.

Starting from ratings assigned by MSCI (as one of the most relevant providers for investors), we have looked into 6 successful cases (Banca Ifis, Moncler, Technogym, Unicredit, We Build and Zignago Vetro) of Italian companies having experienced a virtuous path of their ESG ranking and conducted interviews with their ESG teams.

We have identified 2 common elements and 3 key factors highlighted by interviewed companies, representing 5 best practices for a winning ESG strategy.

The two elements in common were:

1)    Having an internal team dedicated to ESG positioning: all companies we have interviewed have at least one person (more often two or more) in charge for ESG communication/reporting, who also interact with ESG rating providers, fill-in their respective surveys, ensure all information on the company’s ESG achievements is properly captured, perform gap analysis to detect the potential areas of improvement, do constant benchmarking with sector peers;

2)    Having specific targets in terms of ESG positioning: management incentive plans at the interviewed companies are linked not just to ESG targets but specifically also to ESG positioning. Among the companies analyzed we have found different approaches in this respect: targeting a best-in-class or above-average positioning within the sector, constantly improving or at least confirming the ESG rating year after year or aiming at achieving and maintaining a specific rating (AA or AAA).

Here are instead the three key practical suggestions surfaced from the interviews:

3)    Transparency and public disclosure: given how complex is the interaction with ESG rating providers, most often gaps in the ESG positioning are the result of a misunderstanding by the rating provider, which can be avoided or gradually amended by offering more accessible, clear and detailed information;

4)    A gradual approach: rating providers require a very large amount of data and information, their ESG surveys are quite time consuming, with little degree of overlapping and standardization among the different providers, and most often involve several areas of the company. A suggestion in this respect is to opt for a gradual approach, i.e. starting by answering more basic questions and then gradually provide more details year after year with an iterative process;

5)    Setting priorities: there are many different ESG rating providers and dealing with all of them can be overwhelming, particularly in the early stage of the interaction, with the need of understanding their specific requests, their approach, their criteria. The suggestion in this case is to set-up some priorities and focus the team efforts on one of them at a time.

A virtuous ESG ranking path, in turn, is important to drive inclusion in main ESG indexes and also has positive implications in terms of stock performance. As a way of example, MSCI ESG equity indices have performed better than their traditional benchmarks YTD notwithstanding a weakening traction of ESG funds, signaling that corporates with a high ESG positioning continue to be more attractive to investors. As a matter of fact, Morningstar data show a sharp deceleration in inflows of sustainable investments in Europe and even persistent outflows in the US and in Asia: however, in our view, this should not be read as the sign of a decreasing attention for ESG themes but rather simply as the result of a maturing industry and also of stricter regulations introduced for ESG funds under the SFDR to avoid greenwashing (thus creating a pause in the launch of new funds).

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