Beneath the surface: How ESG ratings fall short in addressing the risks and impacts of plastics
Following its assessment of six providers with significant influence in the global market, this new report from Fair Finance Germany lead member - Facing Finance - identifies blind spots in ESG rating coverage of plastics risks and impacts.
- Most providers overlook carbon emissions specifically associated with plastics production.
- Only one provider sufficiently assesses the overall plastic footprint of companies.
- The study reveals gaps in assessing the ambition, feasibility, and impact of plastic reduction targets.
- Social impacts of plastics, particularly in relation to social inequalities, are largely neglected.
- The integration of financial risks associated with plastics lacks clarity in ESG ratings.
- Facing Finance calls on ESG rating providers to better integrate plastics-related criteria into their methodologies and to enhance transparency and accountability.
Plastic pollution has reached alarming levels globally, with 8.3 billion tons of plastic produced over nearly seven decades, resulting in 6.3 billion tons of waste as of 2015 [1]. However, the numerous environmental, social, and financial risks associated with global plastic pollution have yet to be adequately reflected in ESG ratings, new research from Facing Finance reveals today.
Beneath the surface – Do ESG ratings capture the risks and impacts of plastics? investigates the extent to which plastics-related factors, including environmental and social impacts, and financial risks, are integrated into ESG ratings for companies operating within industries linked to the plastics lifecycle. The report further analyzes the level of transparency exhibited by ESG rating providers in disclosing information about their methodologies, data sources, and ratings rationale, among other things.
A framework was developed to assess how ESG rating providers address the pressing but often neglected issue of global plastic pollution in their ratings of companies. The assessment criteria were largely informed by relevant international standards and initiatives, as well as research conducted by organisations with significant expertise in the field of plastics, and additionally reflect the key principles that form the basis of transparent ratings and the challenges observed in the ESG ratings market.
Five reputable conventional ESG rating providers (MSCI, S&P Global, ISS ESG, Sustainalytics, LSEG) and the non-profit organization CDP were selected for the study. Overall, there is a positive tendency, with all providers incorporating at least some plastics-related factors, particularly in critical industries such as petrochemicals and fast-moving consumer goods. However, performance levels vary, with CDP leading the way, MSCI and S&P Global performing moderately, and ISS ESG, LSEG and Sustainalytics lagging behind.
The analysis suggests that ESG ratings often fail to adequately capture the material environmental and social impacts of the activities of companies responsible for single-use plastics production, use, and subsequent pollution, while it is also unclear whether the financial risks that these companies are exposed to are sufficiently acknowledged. On the environmental side, notable omissions include the consideration of companies’ climate impact. Only one provider (MSCI) confirms the consideration of carbon emissions across the plastics value chain, with implications for companies heavily reliant on fossil fuels. There is also a general lack of critical assessment of the ambition, feasibility and impact of companies’ plastics reduction targets. In addition, only CDP comprehensively addresses companies’ reliance on virgin plastics. The gap is even more striking when looking at the social dimension: Most providers address the health aspect of plastics, albeit only partially, while none consider the impact of plastics on social inequality.
“While ESG ratings are instrumental in guiding investor decisions, our study highlights their limited coverage of plastics-related risks and impacts,” says Kleopatra Partalidou, coordinator of the study. “We call on ESG rating providers to address this gap and ensure a more comprehensive and transparent assessment of companies’ sustainability performance.”
Private and public investors and financiers often rely heavily on third-party ESG ratings to inform their ESG strategies, meaning that these ratings play an important role in how they perceive companies’ sustainability performance. Integrating plastics-related factors into ESG ratings in a meaningful and comprehensive way would therefore also enable investors to make more informed decisions, assess companies’ sustainability performance more accurately, and identify those companies that are better positioned to thrive in a circular economy.
“If we can influence the raters to systematically include the issue of plastics in their ESG assessments of companies, we can ultimately influence market decisions and corporate behavior,” adds Kleopatra Partalidou.
A comprehensive and transparent assessment of plastics risks and impacts would also be of great importance in light of the Global Plastics Treaty currently being negotiated by UN member states. The latest draft for an “international legally binding instrument on plastic pollution” includes financial measures only as an option, proposing that Parties take steps to reduce domestic and international, as well as public and private, financial support for projects that contribute to “emissions and releases to the environment from plastics and plastic products across the lifecycle, including microplastics”, while at the same time increasing investment in initiatives aimed at preventing plastic pollution and enhancing waste management infrastructure [2].
“The future UN Plastics Treaty must also include binding requirements for the public and private financial sector, because it plays an important role in the systemic change towards a zero-waste world. For this, the financial industry depends on reliable and comprehensive sustainability information, which must also be provided by rating agencies,” argues Thomas Küchenmeister, founder and Managing Director of Facing Finance.
The report also underscores the need for greater transparency in ESG ratings. While progress has been made, there are areas where further improvement is needed, particularly in the disclosure of more detailed methodologies, including indicators and measurement practices, as well as the disclosure of more detailed information on how each rating was derived. More comprehensive and prominent disclosure of potential conflicts of interest is also needed, as is a more meaningful and transparent engagement with stakeholders. Moving forward, greater transparency across all aspects of ESG ratings would significantly enhance credibility, accountability and usefulness to stakeholders, including investors who rely on these ratings for decision-making.
For more information, access the full report, executive summary, and detailed assessments of the selected ESG rating providers below:
For media inquiries, please contact:
Thomas Küchenmeister
Managing Director
Facing Finance e.V.
Phone: +49 (0)175-4964082
Email: kuechenmeister@facing-finance.org
The report was funded by the Plastic Solutions Fund.
The report was supported by the #BreakFreeFromPlastic movement.
[1] https://www.science.org/doi/10.1126/sciadv.1700782
[2] https://wedocs.unep.org/bitstream/handle/20.500.11822/43239/ZERODRAFT.pdf
