7 minute read
The ESG data challenge
One of the key challenges that investors face when it comes to ESG, is the quality of the available data – both from individual companies and from the data provided by ratings agencies.
ESG data (in)consistency
ESG data is not consistently reported across companies, geographies, and sectors due to varying levels of regulation and cultural expectation. This means that company management has a high level of discretion regarding what ESG data they do or do not report on. This can lead to both too little, and too much, data being shared. In addition, most ESG is not audited. A lack of standardisation around reporting methodologies also means that even when firms report on their ESG data, it can be difficult to compare across their peers.
- Most ESG ratings agencies use different techniques and assessments, which makes their rating difficult to compare and uncorrelated
- Judgements on ESG materiality and definitions may vary between analysts – because the numerical reckoning of a given ESG issue is subjective, the same issues could end up being scored differently by different analysts
- These differences and inconsistencies may be magnified by cultural or regional differences – different countries have differing governance best practices and views regarding risk and materiality
ESG data providers & rating agencies
| Provider | Type of data |
| Bloomberg | ESG disclosure scores Third party scores Company-reported ESG data |
| Sustainalytics | Company ESG ratings reports Portfolio ESG analytics ESG data Carbon analytics ESG risk rating |
| ISS | ESG scores Governance ratings |
| RepRisk | Company ESG reports ESG controversy monitoring |
| TruVaue Labs | Company ESG reports Portfolio ESG analytics |
| Owl Analytics | ESG score aggregator |
| MSCI | ESG company rating reports Fund metrics Carbon analytics |
| FTSE Russell | ESG ratings |
| HIP | ESG company ratings ESG indicies |
| Vigeo Eiris | ESG controversy monitoring Company ESG rating |
| Inrate | Company ESG rating |
| CDP | Carbon scope data Environmental disclosure scores Environmental management assessment |
| Morningstar | ESG fund ratings |
| Real Impact Tracker | ESG fund ratings |
| Mercer | ESG fund ratings |
| S&P (including Trucost) | Credit ratings Water analytics Carbon analytics |
ESG rating agencies
There are a number of key ESG rating agencies that are regularly referred and exemplify the lack of a standardised approach to rating ESG. The correlation between the various rating agencies is very low, meaning that a given company could have a high rating from one agency but a low one from another.
This section will give more detail on:
- Sustainalytics ESG Risk rating
- MSCI ESG Rating – ESG opportunity score, controversy assessment
- Morningstar sustainability ratings
Sustainalytics ESG Risk Rating
The Sustainalytics ESG Risk rating measures a company’s exposure to industry-specific material ESG risks and how well a company is managing those risks. The rating assigns a category of ESG risk severity that could impact a company’s enterprise value:
- Negligible
- Low
- Medium
- High
- Severe
These risk categories are absolute, meaning that company ratings are comparable across peer and subindustries.
The final ESG risk rating score is a measure of unmanaged risk. This is defined as material ESG risk that has not been managed by a company. It includes two types of risk:
- unmanageable risk – risk which cannot be addressed by company initiatives
- the management gap – risks that could be managed by a company through suitable initiatives but which may not yet be managed.1
MSCI ESG Rating
An MSCI ESG Rating is designed to measure a company’s resilience to long-term, industry material environmental, social and governance (ESG) risks. It uses a rules-based methodology to identify industry leaders and laggards according to their exposure to ESG risks and how well they manage those risks relative to peers.
ESG ratings range from CCC (laggard) to AAA (leader):
| Laggard: | Average: | Leader: |
| A company lagging its industry based on its high exposure and failure to manage significant ESG risks | A company with a mixed or unexceptional track record of managing the most significant ESG risks and opportunities relative to industry peers | Company leading its industry in managing the most significant ESG risks and opportunities |
| CCC, B | BB, BBB, A | AA, AAA |
Watch: ESG rating explained: what are MSCI ESG Ratings?
Key points:
- An ESG lens can help investors identify risks not picked up by conventional financial analysis
- Different ESG risks can impact different industries, however corporate governance, due to its universal importance, is examined for all industries. ESG ratings focus in on what is significant to a company’s bottom line, and comparable with its peer group
- MSCI look at a company’s exposure to industry-specific risks, based on its business activities, size of its operations, and where it operates. Then they look at how a company is managing their risks
- They collect the most relevant, publicly available data from thousands of sources.
- They also consider controversies that may indicate performance failures.
- MSCI assign percentage weights to each ESG risk, according to their assessment of their time horizon and impact. The ESG scores are then combined and normalised relative to industry peers to achieve the overall ESG rating.
- See full transcript here
Morningstar Sustainability Ratings
The Morningstar Sustainability Rating is a measure of the financially material environmental, social, and governance, or ESG, risks in a portfolio relative to a portfolio’s peer group. The rating is an historical holdings-based calculation using the company level ESG Risk Rating from Sustainalytics. Portfolios are given a score from 1-5:
5 – High
4 – Above Average
3 – Average
2 – Below Average
1 – Low
Watch: Morningstar Sustainability Rating: Explained
Key points:
- The Sustainalytics ESG Risk rating focuses on the E, S and G issues that are material to a company’s performance and will take greater account of the ESG risk of a given sector – to give a more comparable ESG score across companies in different sectors.
- The portfolio ESG risk score will just be a roll-up of company risk scores on an asset-weighted basis.
12021. ESG Risk Ratings – Methodology Abstract. 2nd ed. [ebook] Available at: <https://connect.sustainalytics.com/hubfs/INV/Methodology/Sustainalytics_ESG%20Ratings_Methodology%20Abstract.pdf> [Accessed 17 September 2021].
