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CSA: A Crucial Building Block In The S&P Global Ratings ESG Evaluation

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CSA: A Crucial Building Block In The S&P Global Ratings ESG Evaluation

As the salience of environmental, social, and governance (ESG) issues in financial performance increases, the focus on ESG risks and opportunities has skyrocketed over the last few years among corporates, investors, and other stakeholders alike.

In 2019, to help harmonise disparate ESG information and enable entities to better understand the ESG risks and opportunities on their horizons, S&P Global Ratings launched its ESG Evaluation: a forward looking, long-term opinion of an entity’s ability to effectively manage future risks and opportunities. Since then, S&P Global Ratings has continued to develop, refine and enhance the Evaluation. 

In June 2020, we integrated S&P Global’s Corporate Sustainability Assessment (CSA) into the ESG Evaluation. Globally recognised as one of the most advanced ESG scoring methodologies available, the CSA has been identified as one of the “highest quality” and most "useful” ESG assessments by sustainability professionals and investors*. Moving forward, all ESG Evaluations will benefit from the CSA, in order to allow users to better understand and prepare for the ever-evolving ESG risk and opportunity landscape. 

Inside an ESG Evaluation

How does the CSA feed into the ESG Evaluation? To illustrate the role it plays, it’s helpful to understand the mechanics of the ESG Evaluation analytical approach.

Each ESG Evaluation comprises two inputs: the ESG Profile and Preparedness opinion. The ESG Profile score summarises S&P Global Ratings opinion of the current-to-near-term effectiveness of the entity’s ability to manage its risk exposure and uncover opportunities relative to peers. The ESG Profile score combines S&P Global Ratings assessment of three Profiles: Environmental (30%), Social (30%), and Governance (40%).

More than 40% of the ESG Profile is driven by how we apply our macro sector and regional analysis to an entity. The ESG Risk Atlas consolidates our analytical sector knowledge and expertise and provides the foundation for our macro sector and regional analysis, which makes the ESG Evaluation comparable cross-industry and cross-region.

This is also the point at which the CSA comes in. In order to obtain an ESG Evaluation, companies must complete the CSA. The responses provided by a company in the CSA questionnaire are used by S&P Global Ratings’ analysts as a starting point for their comparative ESG analysis of the company. This is bolstered by information gleaned from direct discussions between the entity and S&P Global Ratings analysts.

The second input of the ESG Evaluation is the Preparedness opinion: a qualitative view of an entity’s capacity to anticipate and adapt to a variety of long-term disruptions. To develop the Preparedness opinion, S&P Global Ratings analysts meet with an entity’s senior management and a board member to establish their awareness and assessment of emerging trends and potential business disruptors, as well as associated long-term planning.

Incorporating the views of board and management of the entity’s top risks and its future direction both adds further dimension to the Preparedness opinion, and highlights to investors how the entity’s strategy is likely to deliver long-term material value.

Putting together the pieces

Once S&P Global Ratings has determined the ESG Profile score and Preparedness opinion for an entity, they are combined to produce a relative overall ESG Evaluation score on a 100-point scale. Evaluated companies receive a report which details the analysis and delves into the rationale behind the scores. This report can be kept confidential to use as an internal strategy tool or shared with investors and stakeholders as companies see fit.

Entities with higher scores are, in S&P Global Ratings opinion, more sustainable and less prone to experiencing material ESG-related events, and are better positioned to capitalize on ESG-related growth opportunities, compared to lower scoring entities.

For clarity, the S&P Global ESG Score received upon completion of the CSA and the ESG Evaluation score are different in many ways. S&P Global ESG Scores reflect a company’s industry specific sustainability practices in the past, present and near-term, obtained through completion of the CSA. S&P Global ESG Evaluation is a comparable, cross-sector score and opinion of a company’s ability to manage future risks and opportunities, combining data and insights from the CSA with our analyst sector expertise and direct engagement with the company and board. The ESG Evaluation is a natural continuation of the CSA process.

Since its launch in 2019, the ESG Evaluation has established itself as a vital source of essential intelligence for issuers and investors. In a recent S&P Global Ratings ESG Webinar, the Managing Director, Head of Sustainable Investing at Pinebridge Investments provided the following view:

‘The Preparedness opinion is particularly relevant to my risk lens. It builds on understanding the nexus between the organizational awareness journey of a company, its impact on culture and how it translates into what I call coherent, repeatable and verifiable processes. That is ultimately sustainable decision-making.’

Public ESG Evaluations issued to date have covered the fast-moving consumer goods, water utilities, waste, electricity transmission, energy, oil and gas, infrastructure, telecoms sectors, and most recently, banks and real estate, analysing the ESG risks facing those operating across the globe.

*Source: The SustainAbility Institute by ERM: Rate The Raters Report 2019