State Street Global Advisors' analysis of the ESG score correlations among MSCI, Sustainalytics, RobecoSAM, and Bloomberg ESG is noteworthy for its evidentiary support of the significant company-specific variances among ESG scores - any one of which may portray a company in an extremely positive or extremely negative fashion depending on which rating provider you choose. Illustratively, as shown here, the score correlation between two of the most widely used providers - MSCI and Sustainalytics, is just 0.53:
State Street's Rakhi Kumar and Ali Weiner comment:
These differing methodologies have implications for investors. In choosing a particular provider, investors are, in effect, aligning themselves with that particular company’s ESG investment philosophy in terms of data acquisition, materiality, aggregation and weighting. This choice is complicated by the lack of transparency into those methodologies. Most data providers treat their methodologies as proprietary information. By relying on an ESG data provider’s score, therefore, asset owners are taking on the perspectives of that provider without a full understanding of how it arrived at its conclusions.
They attribute the score variances in large part to: (i) providers making their own determinations as to which factors are material to a company's financial performance without being transparent about how those determinations are made; (ii) differences in sourcing and acquiring ESG data, including use of proprietary statistical models to generate estimates for unreported data; and (iii) proprietary aggregation and weighting (of ESG factors) methods. Using these factors, State Street generated this side-by-side comparison of MSCI's and Sustainalytics' ESG scoring approaches:
See also these recent reports: "State Street Explains its Proprietary ESG Scoring Approach," "ESG Ratings Maze," "SEC's Peirce Likens ESG Ratings to the Scarlet Letter," "Boards Encouraged to Understand & Monitor Sustainability Ratings," "Overview: ESG Research & Ratings Providers," "S&P Launches Company-Directed ESG Ratings Tool; ISS's ESG presentation to the Society on its ratings approach and methodology, and additional ESG Ratings/Raters resources on our Sustainability/ESG page.
This post first appeared in the weekly Society Alert!