6-17. A Case of Insufficient Information Disclosure Leading to a Low ESG Rating

Poor disclosure of information regarding a company's ESG initiatives can lead to a low ESG rating, even if the company is taking significant action. This can cause major problems for a business, including the loss of investment opportunities and an increase in financing costs. This article explains typical examples of low ESG ratings caused by inadequate information disclosure and the lessons learned.

1. The Importance of Information Disclosure in ESG Ratings

ESG rating agencies calculate scores based on publicly available information about a company's environmental (E), social (S), and governance (G) performance. If a company fails to disclose sufficient information, its efforts will not be properly recognized, no matter how advanced they may be. Inadequate disclosure is particularly damaging for critical areas like climate change action, human rights due diligence, and the independence of the board of directors.

2. Examples of Low Ratings from Insufficient Disclosure

A manufacturing company was working on reducing its greenhouse gas emissions but published its data without third-party verification. As a result, a rating agency deemed the data "lacking in reliability," leading to a significant downgrade in the company's ESG rating and placement on a major investor's exclusion list.

In another case, a company only collected workplace safety and health data from some of its factories, failing to provide global figures. This was seen as a lack of comprehensive information, leading to a low score for the reliability of its sustainability report.

3. Impact on Companies

A low ESG rating can erode investor confidence and worsen financing terms in the capital market. It can also affect a company's selection criteria for business partners, leading to lost opportunities across the entire supply chain. A low rating not only triggers a short-term drop in stock prices but also causes long-term damage to brand value, having a severe impact on management.

4. Measures to Prevent Recurrence

To prevent inadequate information disclosure, the following measures are effective:

• Adopt a disclosure framework that complies with international standards (such as GRI, SASB, and ISSB).

• Ensure data reliability by using third-party assurance and external audits.

• Provide comprehensive and consistent information by integrating data from different departments and regions.

• Conduct a materiality analysis that incorporates the perspectives of investors and rating agencies.

Conclusion

Many low ESG ratings are not caused by a company's insufficient actions but by a failure to disclose information properly. Building a transparent and reliable disclosure system is essential for fostering trust with investors and achieving sustainable growth.