Emerging Insight: Decent work in ESG ratings
19 September 2022
Investment strategies increasingly consider Environmental, Social and Governance (ESG) issues, putting ESG in the spotlight of the financial and development sectors. ESG rating agencies play a central role in scoring companies across different areas and their ratings help compare and monitor progress over time. Recent research by the ILO found that rating agencies have good coverage of decent work in their methodologies, but that they also face challenges in rating this topic.
A central challenge for rating agencies is the quality and availability of data. ESG ratings rely mostly on publicly available information from companies, but the requirements for sustainability reporting are not standardized. Not only do companies tend to focus mostly on positive achievements in their reports, but there is also a stronger focus on environmental issues than social ones. Moreover, the data generated by the companies is usually of a qualitative nature, making it challenging to translate them into ESG quantitative ratings.
The study also points to a problem of focus. ESG ratings tend to focus on intentions rather than impacts: companies may have policies, but what impact do they have on decent work? The focus on intentions and policies can be explained by the complexity of assessing impacts and the lack of information about them.
There is also a terminology issue: the concept of decent work has not been picked up by rating agencies, even if ESG ratings build on and include most of the ILO standards in their methodologies. Elements of decent work are spread and diffused throughout their evaluation, making it hard to understand how companies perform on decent work.
Another important shortcoming revealed by the study are the different approaches used by the rating agencies. This variety of methods, combined with the other challenges, makes it hard to establish correlations across rating agencies and decent work aspects.
Despite these challenges, the research highlights the important role ESG ratings and rating agencies play in improving non-financial information disclosure. This is a critical step to moving towards more transparency and aligning financial flows with the Sustainable Development Goals.
The study recommends further analysis of the inclusion of decent work issues in investors’ strategies. In 2021, Social Finance worked with the Global Impact Investing Network to help investors who want to include decent work in their investment strategies. The ILO and its constituents can play an important role in other areas of the ESG ecosystem as well, for example in providing information, guiding investor behaviour and supporting the management of employees’ savings plans.
A central challenge for rating agencies is the quality and availability of data. ESG ratings rely mostly on publicly available information from companies, but the requirements for sustainability reporting are not standardized. Not only do companies tend to focus mostly on positive achievements in their reports, but there is also a stronger focus on environmental issues than social ones. Moreover, the data generated by the companies is usually of a qualitative nature, making it challenging to translate them into ESG quantitative ratings.
The study also points to a problem of focus. ESG ratings tend to focus on intentions rather than impacts: companies may have policies, but what impact do they have on decent work? The focus on intentions and policies can be explained by the complexity of assessing impacts and the lack of information about them.
There is also a terminology issue: the concept of decent work has not been picked up by rating agencies, even if ESG ratings build on and include most of the ILO standards in their methodologies. Elements of decent work are spread and diffused throughout their evaluation, making it hard to understand how companies perform on decent work.
Another important shortcoming revealed by the study are the different approaches used by the rating agencies. This variety of methods, combined with the other challenges, makes it hard to establish correlations across rating agencies and decent work aspects.
Despite these challenges, the research highlights the important role ESG ratings and rating agencies play in improving non-financial information disclosure. This is a critical step to moving towards more transparency and aligning financial flows with the Sustainable Development Goals.
The study recommends further analysis of the inclusion of decent work issues in investors’ strategies. In 2021, Social Finance worked with the Global Impact Investing Network to help investors who want to include decent work in their investment strategies. The ILO and its constituents can play an important role in other areas of the ESG ecosystem as well, for example in providing information, guiding investor behaviour and supporting the management of employees’ savings plans.