$30.7trn of assets under management (AuM) are invested in sustainable funds and all signals suggest this figure will grow into the 2020s. The worldwide rise in sustainable investments means that a company’s ESG rating is now more important than ever.
Capitalising on this growing demand, there is now a wide range of ESG data analytics and ratings companies, which asset managers, investors, and suppliers use to determine the sustainability of potential investing.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
Ratings agencies analyse the performance of a company based on proprietary frameworks to provide an overall ESG Score.
Consequently, there is now an abundance information on a company’s ESG performance: a single company can have as many as five different ESG ratings.
Take for example General Motors (GM). Three of the leading ESG ratings providers: CSR Hub, RobecoSAM, and MSCI all have conflicting views about GM’s ESG performance. CSR Hub rates GM 83 out of a possible 100 which is a strong score, similarly RobecoSAM rates GM 96/100.
However, MSCI rates GM CCC which is the lowest possible rating. These vastly different scores reflect the different criteria being used to assess companies, the different weighting of those criteria, and the types of information used to assess each company.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataMore information should help make better-informed investment decisions. However, conflicting information clearly does the opposite. Conflicting information makes it difficult to calculate a consensus opinion on a company’s ESG performance, rendering ESG ratings unreliable. How can an investor make an informed decision when one ratings company gives nearly full marks, while another gives the lowest?
Likewise, companies wishing to improve their ESG rating will struggle on where to focus their efforts to improve their performance.
Where do we go from here?
In order for ESG investments to grow, the process must be made as simple and transparent as possible. This can be achieved through standardisation, just like how financial reporting and analysis is conducted, this idea has been discussed in the blog (Sustainable investments – driving organisations to be ESG compliant). The different ESG agencies can then compete with different assessments that are in addition to a common core benchmark. For example, ESG ratings provider Arabesque has a unique temperature score which quantifies the extent to which corporations are contributing to the rise in global temperature.
GlobalData has developed an ESG framework which can be seen in the recent sustainability report. The framework highlights the contributing factors and mitigating actions for environment, social, and governance issues. The framework is designed to be used by ratings agencies and investors to analyse the ESG performance of a company, and for companies to assess their own performance. The framework helps companies identify the factors that contribute to poor ESG performance, but also lists mitigating actions that help improve performance.
By using a standardised framework, ratings companies will reduce the amount of conflicting scores for companies, simplifying ESG investment and helping firms to improve their own ESG performance.
