How do ESG Software Ratings Work?

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Organizations of all sizes are being compelled - through drivers like regulation and consumer demand - to finely track and set goals for their environmental impacts (like their carbon footprint), social progress (like employee turnover rate), and governance (like data security). Accurately quantifying these metrics has historically been challenging, owing to a lack of data, transactional friction in obtaining the data, or an absence of standardized methods of computing these metrics. Environmental, Social, and Governance (ESG) platforms recently emerged as a new software category to facilitate creating effective data-driven baselines and ongoing tracking toward goals, and dozens of providers have entered the market, estimated to reach $1.5 billion by 2027. Third-party raters have simultaneously emerged to help the buying market understand the relative capabilities of various ESG software providers. Still, the raters and methods used vary widely, but the variation and information underpinning ratings are often opaque to the buying market. This post unpacks the process ESG software companies undergo as part of the rating process and highlights how the buying market should consider third-party ratings in their decision-making process. 

How Did ESG Platforms Emerge as a New Software Category?

For years, many large companies and organizations have voluntarily reported on select sustainability-related metrics. In essence, companies decided the factors on which they chose to document and put them out into the world, leaving investors and the public to understand whether their environmental, social, and governance (ESG) activities were any good. Thus, the process of stringing together bits of information, mainly manually, from various places just kind of “worked” in the absence of any real drivers mandating accuracy, completeness, or transparency. 

The old “wild west” ways of tracking and reporting on sustainability progress shifted in recent years, owing to multiple factors like global alignment to make tangible progress on climate, new standards to align everyone on the methods used to compute and report their impacts, and the proposal or passage of regulations requiring uniform disclosure of ESG metrics and progress. With the ingredients of (i) standards alignment and (ii) a woefully inadequate status quo around tracking organizational ESG impacts, the opportunity for software companies to improve the accuracy and efficiency of sustainability and ESG program tracking and reporting was born.

In 2024, the ESG software industry counts dozens of providers vying for market share in what’s estimated to be a multi-billion dollar opportunity. Because of the market and regulatory dynamics, more organizations are creating goals and tracking ESG progress for the first time, while others who previously reported voluntarily are stepping up their game to meet more rigorous demands for accuracy and transparency. As in other software categories like data analytics, customer relationship management, and many others, a host of third-party software ratings agencies have begun to focus on the ESG software space to help buyers understand relative capabilities, limitations, and other factors. Getting the software selection right is critical for corporates and other organizations compelled to implement a rigorous ESG program, so third-party raters have an important role to play in helping sort out the software market’s current and future capabilities, which is accomplished by evaluating each software platform, create metrics for comparison, and reporting on the findings. 

How Does the ESG Software Rating Process Work?

I co-founded a global team at Salesforce called the Sustainability Practice - we sat at the nexus of multiple teams at the company (Sales, Innovation, Distribution, Corporate Sustainability, and the Product team for Salesforce’s ESG Software, Net Zero Cloud) and our main job was to deliver expert advice, guidance, and best practices to sustainability leaders at hundreds of the world’s largest companies. Part of my job involved deeply understanding the ESG software landscape and supporting the product team when they engaged with an ESG rating company, mainly to ensure the software’s capabilities were clearly and effectively communicated to achieve the best possible rating. Positive rating outcomes were a powerful tool for software sales teams when speaking with customers, as these outcomes provided independent validation of the software’s capabilities and the likely strength of planned developments. Conversely - a negative rating outcome created a challenge for sales teams who could struggle to explain why the software platform was not rated or carried a less-than-desirable rating.

ESG raters usually go through these steps in their analysis: 

1. Reviewing the landscape review of available software providers and determining (based on a desktop analysis) which providers are “in scope” for their rating exercise. 

2. Asking in-scope providers if they are willing to participate in the ratings exercise.

3. Sending participating software providers a questionnaire about the software company and its product. 

4. Reviewing the questionnaire responses.

5. Participating in a live demonstration of the ESG software. 

6. Collating all results and drafting their ratings.

7. Publishing the ratings either as is or after debriefing with the software provider. 

The process takes around two to four months end-to-end and requires a good deal of work both for the raters and the software providers. Steps 1 and 2 are pretty straightforward - for the remainder of the post, we’ll focus on Steps 3 through 7.

The ESG Software Questionnaire and Product Demonstration

ESG software companies, once confirming their participation in a rating exercise, usually receive a spreadsheet-based questionnaire that asks about a range of topic areas. The questionnaire typically covers areas like:

1. What industries does your software serve?

2. How large is your customer base?

3. What features and functionality does your software currently have?

4. What features and functionality are you planning to build into your software? 

Here’s an example of how a questionnaire may look. 

Pretty daunting, huh? Software companies generally have two to four weeks to evaluate, assemble, and submit their initial responses to the rating company, which typically requires multiple stakeholders to review, provide input, and approve responses before submission. 

Once questionnaire responses are submitted, the rating company will analyze responses and schedule a time to view a demonstration of the software. The demonstration helps to make the written questionnaire responses “come to life” while acting as an essential check on claims made by the software company. A typical demonstration will last around two to three hours, including the software team walking through a series of scenarios demonstrating how the software works. The preparation for a software demo typically requires solution engineers to compile existing “demo assets” and develop new ones that respond to the requests of the software ratings company. The demo addresses pre-defined elements and spontaneous back-and-forth requested by the rating company. 

After the Demo

Once the demo is complete, the bulk of the software company’s work is done, but the work of the rating company is just beginning. They work to combine the objective and subjective information gathered from the questionnaire and product demos from all of the different software companies they are evaluating and use quantitative and qualitative techniques to score the capabilities of each platform they review. Evaluation criteria are typically weighted to enable a relative ranking or comparison between each software provider. 

After the ranking and scoring process concludes, the rating company will furnish draft findings (e.g., overall rating, summary of strengths and weaknesses) and schedule a debrief with each software company. Software vendors commonly have an opportunity at this stage to address any aspects of the review that have been egregiously missed or otherwise misunderstood. However, this only sometimes happens, and a rating company may or may not adjust draft findings in response to the debrief. 

Obvious and Non-Obvious Factors that Influence ESG Software Ratings

The ESG software rating process includes a blend of straightforward, objective measures, along with a good deal of subjectivity. So, what are the factors that most strongly influence a software provider’s ESG rating? 

1. Experience Level of the Rater(s). Interestingly, while the focus of the ESG software rating process is on the software company and its offering, there are no standards for the raters who carry out the software ratings. Ideally, the rating company and the people doing the rating have expertise in the subject matter (in this case, ESG matters that corporates and other large organizations deal with) and enterprise software itself. The combination of subject matter and software expertise is rare, given the novelty of ESG standards and software solutions. So, it’s essential to consider this fact when reviewing results for a given rater.

2. Time and Capacity Available to Respond. There are many rating companies, and, as described in this post, the process for participating in a rating exercise comprises many weeks of effort across many individuals at each software company. Bandwidth is always an issue, particularly at start-ups. Thus, many software companies may only choose to participate in one or a few rating processes in a given year and may decide to opt out of several others. Thus, if one software company appears in one rating report but not another, it may be that the company had to prioritize one over the other because of available capacity. Other factors for a company’s omission from a rating could be the software being seen as “out of scope” when evaluating the software product not meeting the maturity threshold set by the rater. Companies with dedicated personnel to respond to third-party raters are more advantaged because they can build processes to craft effective responses while participating in more ratings than software companies with relatively fewer resources.

3. Capabilities of the Software Platform. This one is fairly obvious—many evaluation metrics are straightforward, so there is a clear separation between software platforms with a given capability and those without. For example, if an evaluation metric is “Uses generative AI within the platform to help create an ESG report”, a company with that capability will of course score higher than one without.

4. “Sizzle” in the Product Demonstration. The software demo has an important role, and aesthetics and delivery can strongly influence how the capability and sophistication of a given software is perceived and, therefore, rated. Here, legacy enterprise software platforms are often at a disadvantage compared to newer purpose-built platforms simply because legacy architecture cannot be substantively changed. Raters are human, and platforms with flashy demos can sometimes get a substantive bump across multiple evaluation criteria compared to legacy enterprise platforms.

5. Prohibitions to Responding to Certain Common Questions. A significant part of ESG software ratings involves metrics around investments in the product, the number of engineers working on the platform, and the size of the customer base. At Salesforce and other publicly traded companies, strict policies and confidentiality requirements prevent specific data from being given on these metrics, even at a high level. So you can imagine the difficult task of a rater comparing one company that says, “We have 163 customers in 24 countries with $50 million in annual revenue and a team of 35 full-time employees building and delivering our product” versus “Our company policy prevents us from disclosing specific customer numbers, installation base, and internal resourcing for our product.” 

Should Corporate Sustainability Teams Use Third-Party Ratings in their ESG Software Evaluation Process, and if So, How?

Yes, third-party ratings of ESG software can be an essential tool for corporate sustainability teams and others in the market to purchase ESG software. Here are some tips and considerations for how sustainability teams can leverage ESG software ratings:

1. Never over-rely on a Single Third-Party Rating in your Decision-Making Process. Several variables play into how a given software company scores, so use reviews from multiple rating companies and pay attention to software providers who consistently rank highly. 

2. Which Ratings Group Should You Pay Attention To? Figuring out which raters to pay attention to is as tricky as figuring out which ESG software to select, as many raters exist. Gartner, Forrester, IDC, and Verdantix appear to have put more resources and expertise behind their ESG teams, so those companies are good places to start. 

3. Source and Use ESG Rating Reports to Inform Your Request for Proposal. When the ESG software review process concludes, the software company participants can license and freely distribute part or all of the raters’ report for a fee. The ESG software raters also publish and sell these reports to the public, usually costing several hundred or several thousand dollars. However, sustainability teams may dig on LinkedIn, Google, or Perplexity (or you could click here, here, or here to download a rating report from one of the ESG software provider’s websites). The reports typically provide a helpful and well-organized narrative describing the capabilities of each participant, along with the quadrant, which sustainability teams can use to help narrow the field of providers they will invite to bid when they are in the market for ESG software. Corporate sustainability teams should leverage the time, effort, and financial resources that software companies and raters put into developing and disseminating these reports to help speed time to action and clarify their decision-making process when purchasing ESG software.

Thank you so much for reading Sustainability at the Frontier. We’ll see you next time - if you’re viewing this post in your email, please hit reply and provide us with any of your constructive feedback or perspectives.