The number of firms getting an ESG scorecard or rating is increasing exponentially. For example, EcoVadis, a self-proclaimed leader in sustainability ratings and assessments, showed participating firms rose from 90,000 in 2021, to 150,000 in 2024. When these surveys are accused of being tick-box exercises and the indisputable fact that some ESG scorecards can be gamed, is this growth a good thing?
Certainly not when a fixation on an ESG score leads to the survey contents dictating the firm’s sustainability strategy, as, much like painting by numbers, the results will be unimpressive. However, idealism is the enemy of progress in sustainability, so let’s explore the possible good role ESG surveys can play in driving positive impact.
ESG scorecards and ratings were born to satisfy investors’ and other stakeholders’ desire to understand and compare corporate sustainability risk and impact. A new industry then emerged offering services to grade and rank a firm’s environmental and social credentials, resulting in the current mixed-bag landscape of surveys and questionnaires that vary in quality and rigour; the worst being likened to pyramid schemes.
For firms that don’t typically disclose much for regulatory compliance, an ESG scorecard or rating request is often their first interaction with a sizeable new set of sustainability expectations. It will capture the attention of the senior team if it’s an RfP requirement from a major supply chain partner or investor due diligence, especially when the financial implications are significant.
Although a veneer of nice words about sustainable practices, some off-the-shelf copied policies and long-range future targets will suffice for some surveys, this approach belies the future financial risks of not embedding sustainability in operations.
To start, the scorecards rarely assess the opportunity from sustainability, whereas this is critical to a good sustainability strategy. Using Porter’s Five Forces gives a framework for analysing how a firm can respond to potential disruption to supply chains, or counter threats of sustainable innovation by new entrants and react to changing consumer tastes.
The scorecards also feel particularly ‘tick-box’ for people-related data, especially on diversity or gender pay gap. These data requirements invariably raise issues at the board level as attitudes to people-related policies and targets vary significantly worldwide. Boards can refuse to engage with targets or may opt for a compromise solution by setting goals so far removed in time that they are of little consequence. Additionally in some jurisdictions, collecting diversity data is illegal and there is the current threat of litigation in the U.S. to firms with published Diversity, Equity and Inclusion (DE&I) targets and policies.
Nevertheless, a firm has a responsibility to have a people strategy founded on an analysis of risk, reward and responsibility. The translation of this strategy into data for ESG surveys is a genuine issue, only solved by the firm’s leaders agreeing on the importance of the ESG rating versus the perceived risks from disclosure.
The quality of the ratings and scorecards is getting better though, through the work of activists publicising deficiencies and hypocrisy by calling out firms with exemplary ESG credentials on paper but not in practice. Similarly, the hitherto obfuscated methods used by ESG ratings firms to judge performance are being challenged so that going forward it will not be sufficient to insert a number that a computer can read, regardless of its value.
So rather than being led by the checklist, a firm should be led by a sustainability strategy that delivers an ESG rating or score as an output. Similarly, ratings should not be confused with being an outcome, because they don’t indicate the impact value of a sustainability strategy. But if the ESG scorecard does the valuable job of being a catalyst for change, then I’m good with that, as a start is a start.
Jill Ridley-Smith 