The WSJ’s “How ESG Stocks Perform Depends on Who Ranks Them” discusses the wide variability and inconsistencies in ESG ratings and rankings that often result in a company’s receipt of wildly differing rankings by one or more ratings providers. Its analysis of nearly 500 US companies (many of which were large-caps) rated by Sustainalytics, MSCI, and Refinitiv revealed a lack of correlation between ESG ratings and stock performance, as well as individual companies receiving high, low, and mid-range scores from the three ratings providers at the same point in time.
The article notes:
The reason for the disparity is that each rater creates scores using different data sources and procedures, often emphasizing different aspects of the companies’ behavior. Some methodologies assign scores relative to competitors in the same industry and others assess absolute risk based on a firm’s material exposure to ESG issues.
“Many of our institutional investor clients require multiple, diverse viewpoints on ESG to help them make more informed decisions,” said Sustainalytics’ executive director of methodology and portfolio research, Hendrik Garz.
By way of example, one company was ranked in the top 10% of all companies in its industry by one of the three ratings providers; was given an average rating by another provider; and was assigned a poor rating by the third provider. The ratings notwithstanding, the company’s stock was reportedly among the best performing of the nearly 500 companies scored by all three providers in the first five months of 2021.
See our prior reports: “Primer: ESG Raters and Ratings” and “Study Shows Widespread Use of 3rd Party and Proprietary ESG Ratings”; these reports: State Street Global Advisors, “The ESG Data Challenge,” (revealing the inconsistencies among ESG ratings or, more specifically, a correlation of just 0.53 among ESG scores for four leading ESG data providers for MSCI World Index companies. “These differing methodologies have implications for investors. In choosing a particular provider, investors are, in effect, aligning themselves with that company's ESG investment philosophy in terms of data acquisition, materiality, and aggregation and weighting.”); Feifei Li, PhD / Ari Polychronopoulos, CFA, “What a Difference an ESG Ratings Provider Makes!”; and additional information & resources on our Sustainability/ESG page >>Ratings/Raters.
This post first appeared in the weekly Society Alert!