WHAT IS EXTRA-FINANCIAL RATING?

It is impossible to assess the value of a company based solely on its economic performance in these days, especially because of environmental issues. 

The extra-financial rating makes it possible to assess companies and companies on many other criteria relating to the well-being of our planet. 

1. What exactly is extra-financial rating? 
2. What are the criteria for awarding the score? 
3. What is the impact on businesses? 
4. How to get your business valued?

Tech Explorist lifts the veil for you.

Extra-financial rating: definition

Previously, we estimated the value of a company based only on its economic performance. This is no longer the case. The extra-financial rating is based on respect for the company's social values, on its behavior regarding the environment, its governance and its societal commitment.

This rating is part of the CSR approach, which, let us remember, aims to encourage companies to change their vision and their strategy to integrate environmental and societal issues.

What is an extra-financial rating agency?

The first extra-financial rating agencies were created in the early 2000s. This new type of private agency evaluates the company on several criteria concerning the environmental concept . These are independent companies, paid by investors and not by companies. 

These agencies may or may not be specialized in a particular field. Some work only with small companies, private or public companies, and others focus on the environmental dimension or the societal commitment of the company.

What are the ESG criteria for awarding the extra-financial rating?

Independent companies, extra-financial rating agencies do not rate all companies based on the same criteria. These may also vary by country. The main ESG criteria are:

• The social criterion : the social criterion concerns relations at work, respect for diversity (culture, nationality, sex, sexual orientation, religion, socio-economic status of employees, possibility of development at work for all, etc.), respect rights and concerns working conditions.
• The environmental criterion: the rating agency analyzes the initiatives taken by the company to limit its impact on the environment. Companies with green growth, working in favor of the energy transition and working in favor of sustainable development (use of renewable energies, for example) are rewarded.
• The governance criterion: the agency observes whether the company behaves socially responsibly. Transparency around executive compensation, the distribution of powers, but also the rights of employees and minority and majority shareholders is appreciated.

Other criteria, namely HR management , customer relationship, supplier or subcontractor relationship,corporate governance and societal engagement, are almost always taken into consideration. The agencies consider all the criteria that are not financial.

While the criteria that can earn companies' points are varied, certain factors are eliminatory, regardless of the extra-financial rating agency chosen. Companies employing children, testing their products on animals, or involved in the gambling, prostitution, weapons or tobacco sector are automatically eliminated.

What is the rating method?

Each rating management company has its own extra-financial analysis rating system. Analysts do not rely on a standardized method to perform their rating. However, they often rely on the same operating mode:

• Consult public documents .
• Develop precise questionnaires (for each member of the company and its service providers).
• Organize meetings with employees to determine the performance of initiatives taken by the company. These meetings are also used to verify the application of national standards and the prevention measures taken by the company.

The rating system differs from one agency to another. Very often, the agencies use the rating system of the financial rating agencies, namely ratings from A to D, completed by the signs + or -.

The different extra-financial rating agencies

Here are some rating agencies and their specialization (when they have one):

• DJSI - Dow Jones Sustainability Index: sustainable development.
• TFS - Together For Sustainability: chemical industry
• Standard Ethics: international agency specializing in CSR and corporate governance.
• Nonethic: sustainable finance and climate, responsible business practices.
• Vigeo Eiris: sustainable development and social responsibility.
• EthiFinance: assessment of corporate social responsibility.
• BMJ currawongs: extra-financial rating of communities and companies.
• RepRisk.
• Oekom.
• Triodos Bank.
• Arcet Cotation.
• Innovest.

You got it: rating agencies reward socially responsible companies. Their rating allows companies to get investments more easily, a higher company value, but also a better brand image.

The economic performance coupled with good social performance and environmental commitment is the goal sought by many companies. Do you want to train to take part in the environmental and ethical responsibility of companies? Working for a socially responsible company? Discover our CSR master's program .