ESG ratings: What are those all about?

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May 30, 2023

11 MIN READ

Much of the data and information about companies used in sustainable investing has historically been self-reported, voluntary, backward looking, non-standardized, and, therefore, inconsistent over time and from one company to the next.

In the 2000s, a cottage industry emerged to help make sense of the growing mountain of data by supplying subscribers with raw data, screens (algorithms designed to exclude selected securities based on predefined criteria), and alerts (instant communications that apprise subscribers of changes to predetermined criteria). Providers each developed their own approach to analyzing and synthesizing the data into scores or ratings, intended to simplify subscribers’ assimilation and use of the vast information. Unfortunately, however, even the best of intentions can lead to unwelcome results. In the case of ESG data vendors, it was the ratings more so than the underlying data that has caused frustration and confusion for investors and companies alike.

Consolidating list of ratings and data providers

Over the years, the ESG data and ratings industry has consolidated into several major providers:

MSCI
Sustainalytics (owned by Morningstar)
Refinitiv (owned by Thomson Reuters)
ISS ESG
S&P Global
Bloomberg

And a few key specialist data providers:

CDP
Trucost
RepRisk

According to a 2022 ESG manager survey by management consultancy Opimas, four of the major providers account for nearly 70% market share—with MSCI at approximately 31%, ISS ESG at 17%, and Sustainalytics and S&P Global each at 10%. This consolidation combined with the surging interest in sustainable investing has given these vendors an increasingly important role in the investment landscape. Even so, a basic internet search reveals in excess of 100 different ESG data vendors in the market today (versus three primary credit-rating agencies).

Expanding list of index funds

Meanwhile, the growth of passive investing has deeply entrenched ratings into the sustainable investing landscape. According to the Index Industry Association, there are more than 50,000 ESG indexes available to investors across asset classes globally.¹A single ratings provider, MSCI, has more than 1,500 such indexes, many of which leverage its ratings for constituent selection. In the U.S., 30% of sustainable funds, and 40% of the assets in them, are passive strategies.²

Providers may:

Use more or less data to assess a topic.
Use different data points or indicators to assess a topic.
Use different ways to measure the same data.
Use different methods to translate qualitative insights into quantitative data.
Have different views on which issues are material for a given company or sector.
Put different weights on factors across companies.

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Read the full commentary.

1. https://www.indexindustry.org/sixth-annual-index-industry-association-benchmark-survey-reveals-continuing-record-breaking-esg-growth-multiasset-expansion-by-index-providers-globally%ef%bf%bc/
2. https://www.morningstar.com/lp/sustainable-funds-landscape-report

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