Extra-financial rating agency: a new tool for responsible finance

A financial rating agency is an independent organization that evaluates the creditworthiness of a company, a community or even a state. However, this form of evaluation does not make it possible to account for the social and environmental impact of these actors. Extra-financial rating agencies were therefore created to focus on the social and ethical responsibility of economic operators.

Qu’is it’An extra-financial rating agency ?

A extra-financial rating agency is based on ESG criteria to evaluate the practices of companies and public issuers such as banks. Beyond their financial performance, these players will this time be rated in relation to other companies environmental, social and governance issues. Thus, these evaluators are also called “social and environmental rating agencies”.

This sector currently has about thirty specialized players such as Novethic or the French agency: Vigeo. For the moment, the most important brands are mainly concentrated in Europe, notably Arcet Cotation, Gavet & Bacqué, Oekom, RepRisk, Triodos Bank… However, this market is also of interest to large financial rating agencies such as Moody’s or Standard & Poor’s & Poor’s.

Moreover, Moody’s has already introduces ESG risks in its credit rating method. The agency has also developed a formula focused on green bonds (green bonds). Standard & Poor’s, for its part, has had access to an environmental database since the acquisition of Trucost.

It offers more than 150 S&P Dow Jones ratings built with ESG factors in mind.

Following the Cop21 in 2015, some rating agencies decided to focus on specific areas. In addition, they can also rate local governments on environmental, social and sustainability issues. On the French market, ORSE (Observatory of Corporate Social Responsibility) holds a dedicated guide to this type of organization.

How they work ?

A extra-financial rating agency is inspired by the model of the actors evaluating the solvency of companies. However, these players do not have standardized criteria because of the absence of recognized common reference systems. However, they are based on various international conventions.

The latter are based on the recommendations of the EU, the OECD and the UN, among others.

The auditors are paid for by investors, unlike financial rating agencies paid by the issuers of securities. This system is supposed to limit conflicts of interest. That said, companies can also contact a player such as Standard Ethics to carry out a solicited rating or SSR (Solicited Sustainability Rating).

This European agency is based in Brussels and London.

Extra-financial ratings are particularly useful with SRI (socially responsible investment) funds. Indeed, these financial products integrate environmental and societal parameters in the choice of the financed projects. These portfolios therefore only support companies that are in line with their stated values (promotion of energy transition, circular economy…).

In practice, the rating agency evaluates operators using public documents, surveys and internal interviews. These analysts also have specific methods for making the approach consistent with sustainable development. They can also introduce other ethical criteria according to the wishes of responsible investors (diversity, parity, etc.).

Example of’independent extra-financial rating agency : Ethifinance

Founded in 2004, theextra-financial rating agency Ethifinance specializes in theevaluation of European SMEs, whether or not they are listed on the stock exchange. It is defined at its creation by the status of SCIC (cooperative society of collective interest). Since then, the company has offered to advise responsible investors in their SRI approach.

On the other hand, the independent agency is characterized by its engagement towards the CSR policy of’a company. Its team is committed to working with operators who share the same ethical values. Indeed, the aim of rating systems is to limit the societal and climatic risk in the investment process.

Private companies will thus have a responsible approach.

According to the agency’s founder, the Ethifinance adventure began after the Enron scandal. This is a real awareness of the need to reconciling human development with economic performance. This positive perspective necessarily requires the consideration of all stakeholders within the company.

It also takes into account the ESG issues in the economy.

Since 2017, Ethifinance has merged with Spread Research to create the Qivalio group. The latter operates on the international market through the rating agencies EthiFinance, Gaïa Rating, Spread Research and Spread Ratings. These brands are still specialized in financial and extra-financial ratings of companies, institutional organizations, investment funds, etc.