Don’t hate the ESG rater, hate the very subjective ESG game. With the upcoming regulatory changes  for investors to integrate ESG, we outline the specific issues investors should pay attention to. We also summarize the current state of ESG data, trends impacting the industry and the meaning of ESG.

THE RATERS

ESG rating agencies have faced a lot of criticism in recent years – particularly for the lack of correlation between provider scores. The WSJ, Financial Times, CSR Hub, ACCF, Man Group and the CLSA have all contributed to a growing body of research that examines the large discrepancies across ESG scores. The lack of industry consensus on how to evaluate company ESG quality means that vendors can differ greatly in scoring methodologies. Vendors differ across:

1) ESG factor focus – some vendors put a strong focus on a company’s ESG policies, some will focus more on incidents and others will focus on compliance.

2) Data sources – this varies from company disclosure information, ESG surveys proprietary to the provider and some use alternative data sources such as news articles or NGO databases. Another consideration to make is different data sources will have varying lengths of data history and frequency.