4 Reasons Why ESG Ratings Must Be Core Of A Modern Brand

If your firm hasn’t yet embraced ESG investing—a method of investing that meets defined criteria in Environmental, Social, and Governance categories—you could be missing out on a key lever of growth. Brands with high ESG ratings have not only proven to make a stronger impact and grow faster than less sustainable firms, but also outperformed those with poorer ratings

However, implementing ESG ratings to your overall brand strategy doesn’t happen overnight. It takes a consistent plan to effectively weave those values into your core purpose to align to both consumers and investors. But the benefits far outweigh the risks. Read on as we explain four reasons your company should be embracing ESG ratings now to get ahead of the competition. 

Reason #1: ESG is Integral to Your Firm’s Purpose

In the PE/VC world, the industry is changing faster than ever, leading firms to continually test new ways to surpass the competition. 

To get a jump-start, firms can embrace an ESG culture as part of their core purpose by leveraging those values as a guiding light in any decision-making moment—especially during times of crisis or uncertainty.  

Reason #2: ESG Priorities Drive Supply Chain Decisions

With sustainability at the core of ESG agendas, transparency in how you source and buy is key in proving to consumers that you are sustainably conscious. 

By taking the time to thoroughly understand how direct suppliers (and the several downstream vendors they’re connected to) source materials and operate, firms can select partners that help them achieve a fully sustainable supply chain. While this can be a research-intensive undertaking, the long-term benefits not only include ESG-met goals, but can also help lower cost, conserve resources, and earned consumer trust.  

Reason #3: ESG is Integral to the Employer Brand Strategy

By making ESG a core part of your brand strategy, companies can serve a three-fold audience of investors, consumers, and employees. To start, consumers want to do business with, and buy products from, companies that reflect their core values, especially in relation to positive environmental, social, and governance values. Whatsmore, investors want to be sure their finances are going toward activities that don’t pose a reputational risk

With Millennial and Gen Z talent expected to make up over two thirds of the workforce by 2030, companies that integrate ESG standards as a core function of their business better align to these generation’s sustainability values—a critical piece to growing (and maintaining) employee retention and satisfaction rates in today’s competitive talent market. 

Reason #4: ESG Focus Amplifies Value to Shareholders

Shareholders invest for the long term, and benefit more from sustainable value accrued over a few years versus short-term quarterly revenue growth. ESG performance is directly related to higher economic value added (EVA) margins, while higher stock volatility is linked with poor ESG performance. Because of this, brands that reflect the core values of key stakeholders experience stronger overall performance and provide more value.

…But Not All ESG Ratings are Created Equal 

As more and more firms make the shift toward socially responsible investing, it’s important to keep in mind that the biggest challenge the industry faces is how to accurately and consistently measure environmental and social impact. Because the ratings are measured differently across agencies, ESG ratings can be an inconsistent measure of performance. 

From discrepancies in quantitative data points, to qualitative “greenwashing” (which aims to put a positive spin on otherwise mundane data), ESG rating agencies often take self-reported data from brands and add in their own information to form a somewhat biased report. As such, the majority of these reports are unique to the brand, making it difficult to compare them to another company, so a standard, objective rating system is nearly impossible to achieve. 

The three main factors driving ESG ratings divergence include:

  • Scope Divergence: Occurs when ratings are based on different attributes (ie: carbon emissions and labor practices being measured by one agency and not another) 
  • Measurement Divergence: Occurs when agencies compare the same attributes but use different raw data (ie: both agencies compare carbon emissions and labor practices, but use different data criteria, resulting in entirely different interpretations)
  • Measurement Divergence: Occurs when agencies weigh factors of their rating system differently (ie: Agency 1 considers carbon emissions a majority factor, while agency 2 places greater weight on labor practices)

Finally, there’s a “rater effect,” meaning if a firm receives a high score in one category (ie: carbon emissions) they’ll be more likely to receive high scores in all other categories, thus boosting their rating regardless of scores in other areas being evaluated. 

Future-Proof Your Portfolio with Altvia

As systems and processes evolve to standardize ESG ratings, PE/VCs can get a head start by integrating non-financial data with traditional data to build a comprehensive report across firm and industry performance. By providing transparency throughout these reports, and running thorough due diligence, firms can provide shareholders with a full picture analysis of efforts and impacts as they relate to ESG.

To begin building your ESG investment strategy and future-proof your portfolio, the first step is compiling all of your data in a centralized platform. Altvia can help. To learn how, reach out to our team to start a conversation.