ESG rating: How does it work?

Investing your money sustainably and having a good conscience in addition to a good return – who wouldn’t want that? SRI (Socially Responsible Investing) or ESG investing (Environmental, Social, Governance) is more popular than ever before. New investment opportunities are constantly coming onto the market that claim to invest sustainably, for example sustainable ETFs, which practically all banks and fund providers now have in their programmes. The decisive factor for investors is, of course, whether ESG is really in it if it says ESG on it.

For SHS, the topic of ESG or socially responsible investing is not new territory. As a private equity company, SHS has been investing according to ethical standards for almost 30 years, as SHS Managing Director Hubertus Leonhardt emphasised in an interview. The importance of the topic for SHS is also underlined by its membership in the United Nations Finance Initiative: PRI (Principles for Responsible Investing)

At SHS, ESG is firmly anchored in a binding ESG policy, compliance with which is monitored by the SHS ESG Officer. SHS investors regularly receive an ESG report. New investments are screened and evaluated according to ESG criteria as part of the due diligence process. SHS uses the analysis tool of the European VC/PE association Invest Europe, which has been adapted to the healthcare sector. SHS makes no compromises when it comes to ESG and knows that this is entirely in the interests of the investors who invest in the SHS funds.

ESG rating: Who actually does it?

But how can investors, for example in large mutual funds, be sure that their fund savings plan really meets ESG criteria? This is where the ESG rating, which is awarded by banks on the one hand, but above all by ESG rating agencies, can help.

All types of ratings in the financial sector involve the classification of a fund, a company, a share, etc. on the basis of certain, previously defined criteria. The best-known rating is certainly the credit rating, which provides information on whether an issuer (such as a state issuing bonds) can meet its payment obligations. The better the rating, the greater the attractiveness of an investment or an issuer. Ratings are usually assigned by the banks themselves or by special external rating agencies, the best-known of which, Moody’s, Standard & Poor or Fitch, are recognised worldwide. The scale of ratings usually ranges from AAA to D. With the latter, default has usually already occurred

ESG rating agencies

With regard to ESG ratings, there are also internal and external ratings. The latter are assigned by rating agencies that specialise in evaluating sustainable investment products according to ESG criteria. The best-known ESG rating agencies are: MSCI ESG, Sustainalytics (part of the rating agency Morning Star since 2020), Vigeo Eiris (part of the rating agency Moody’s since 2019), RobecoSAM (acquired by the rating agency Standard & Poor in 2019) and ISS ESG. An ESG rating agency founded in Germany is oekonom research, which has been offering its services as part of ISS ESG since 2018. In 2020, Deutsche Börse AG acquired 80 per cent of the shares in ISS ESG.

While the “normal” rating agencies are under the supervision of the European Securities and Markets Authority (ESMA) and the authorities of the member states, there is as yet no European supervision for the ESG rating agencies. This would certainly be desirable for investors, as the ESG ratings of the ESG agencies differ considerably in some cases. ESMA also sees regulation of ESG rating agencies as important, according to LBBW Research in a paper dated 24.2.2021, especially with a view to controlling financial flows into sustainable projects and ventures as part of the EU’s “Green Deal”. “On the other hand, ESMA observes the oligopolisation of the ESG ratings market with concern.”1

ESG criteria

So what are the three letters E, S and G for assessing responsible investment according to the Principles for Responsible Investment (UN PRI)?

E like Environmental

In this criterion, ESG rating agencies look at the role and attitude a company takes with regard to its impact on nature. The aim is a consistent, sustainable use of all natural resources and a business activity that is ideally emissions-neutral or at least low-emissions. Climate, resources, water and biodiversity should be protected to the maximum. The following points, among others, fall under the first category of ESG criteria: Dealing with climate change, efficient and responsible use of limited resources, sustainable energy management, minimal ecological footprint, disposal or recycling of raw materials and waste water. It is clear that companies that do not take these criteria into account face massive risks in the future in terms of financial losses, criminal prosecution or damage to their image.

S like Social

How is a company doing in terms of social aspects? This is what the assessment of the S-criteria is about. The social aspects of the company’s activities are examined, for example: working conditions, employee protection, human rights, diversity, employee health, occupational safety. In this field, too, a company aiming for a good ESG rating cannot afford to be negligent.

G like Governance

The English word governance originally comes from the Latin “gubernare” and means to control, to lead. Governance assessment is therefore about how a company manages its business and how it behaves towards employees, shareholders, society and the state. Aspects that are examined include: Board remuneration, board composition, data protection, fairness in dealing with business partners, tax honesty, competitive behaviour, allegations of corruption.

ESG has a future

There is no doubt that ESG will continue to play a major role in the future. Not only will the EU’s Green Deal contribute to this, but this is also the view of financial decision-makers surveyed by FINANCE magazine together with LBBW for the FINANCE Study 2021:

“The results of the surveys among financial and corporate decision-makers clearly show that the topic of sustainability has left its niche. Much more: sustainability will be standard in the future. Many companies and their finance departments already focus on sustainable management and assume ecological as well as social responsibility. In future, it will be important to make the company’s own sustainability activities even more transparent and comprehensible for both internal and external stakeholders.” 2

ESG in SHS practice

As already mentioned, the topic of “Socially Responsible Investing” plays a central role for SHS as a healthcare investor. When SHS takes a stake in this sector, the company wants to use its capital and expertise to help improve the health and well-being of as many people as possible. A look at the two SHS portfolio companies Selfapy from Germany and Tyromotion from Austria shows what this looks like in practice.

With its approved and reimbursable Selfapy apps, the growth company Selfapy offers people with depression or anxiety disorders quick and uncomplicated help until they find a place in therapy.

Tyromotion produces high-tech rehabilitation systems for the upper and lower extremities of humans. More than 3500 Tyromotion devices are currently in use in 55 countries. With them, patients regain quality of life and freedom of movement towards a self-determined life after a stroke, an accident, in cases of multiple sclerosis or after spinal cord injuries.3

These two examples show that the healthcare market with its excellent growth forecasts is virtually predestined for the topic of ESG investing. As a specialised private equity company, SHS will continue to play an important role here in the future and show that returns and socially responsible investing are not contradictory.


1 LBBW Research:
3 SHS Newsletter 8/2021: