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The evolution of ESG data: disaggregated scores for precision and transparency

# June 2024

The landscape of business conduct and ESG data is undergoing a profound transformation. ESG ratings are shifting away from traditional scores that compound self-reported data from companies. Historically, these ratings have relied heavily on disclosures and questionnaires, which not only consume significant company resources but often lead to dissatisfaction with the results. Research from last year revealed that publicly-listed companies spent, on average, between USD 220,000 and USD 480,000 annually on ratings-related costs, while private companies spent up to USD 425,000. Despite this substantial investment, many companies have expressed concerns about the accuracy and transparency of ESG data and ratings.

For stakeholders relying on ESG ratings to make informed decisions, an aggregated, self-reported view of a company's ESG performance can obscure specific areas of financial and reputational risks. While companies may report positive initiatives like board diversity and waste reduction, it's difficult to pinpoint their shortcomings without granular impact assessments. Decision-makers increasingly want to understand not just the positive initiatives highlighted in PR campaigns and on websites, but also the risks that companies may be obscuring within their operations and supply chains.

# Regulatory drivers of thematic scores

Recent regulatory pressures highlight the shift towards disaggregating ESG scores and focusing more on the impact companies have on people and the environment. New frameworks and regulations, such as the Taskforce on Nature-related Financial Disclosures (TNFD) and the Corporate Sustainability Due Diligence Directive (CSDDD), emphasize the need for precise and actionable insights. These measures are designed to hold companies accountable for their actions, necessitating disaggregated metrics that provide a clearer picture of corporate conduct risks. Consequently, there is a growing demand for alternative ESG risk data—information sourced independently of companies—that can more effectively evaluate, mitigate, and manage the actual and potential risks associated with specific business practices and ESG factors. This change is crucial in today's increasingly complex business environment.

# Disaggregated ESG scores: A closer look at risk in the S&P 500