SquareWells Partners’ Progress Group recently made public a discussion on the subject of ESG Ratings – Managing ESG Data and Rating Risk. Progress Groups comprise a diverse assembly of thought leaders to provide objective and actionable advice. For this Progress Group individuals from a variety of backgrounds contributed, including:
- Howard Sherman, Executive Director, MSCI
- Hortense Bioy, Global Director of Sustainability Research, Morningstar
- Carole Crozat, Head of Thematic Research, Sustainable Investments, BlackRock
- Cristina Daverlo, Head of ESG Research, Vigeo Eiris (V.E, now part of Moody’s)
- Xavier Houot, Chief Sustainability Officer, Schneider Electric
- Florian Berg, Post-doc Researcher, MIT Sloan School of Management
Discussions were wide reaching and the findings are split into two sections:
(1) Overview of the ESG data and ratings landscape:
- Whilst new players are emerging in the ESG data and ratings space, financial services firms are consolidating larger players under their brands;
- There has been a dramatic expansion of ESG indices, with more than 1,000 ESG indices live in 2020 (in the report SquareWell mapped out ESG Data and Ratings providers servicing ESG ETF investors);
- In discussing issues related to ratings methodologies, and the often confusing mixed ratings received by companies centered around Florian Berg’s, Aggregate Confusion: The Divergence of ESG Ratings, participants agree that divergence can be viewed as “added value” rather than problematic. “Divergence will happen when you go from fact to opinion”, says Carole Crozat, Blackrock; and,
- Mixed opinions were offered on the future of the market. Florian Berg predicted further consolidation, while Hortense Bioy and Eugenia Unanyants-Jackson (Head of ESG Research at PGIM Fixed Income) believe there is room in the market for different types of ratings, and that the use of the ratings will change.
(2) Key takeaways for companies to navigate this increasingly complex market force. SquareWell punctuated the report with recommendations:
- Prioritize which ESG ratings and data providers to monitor based on their use by your investor base;
- Research and map out which ESG topics are considered material for your industry by major ESG ratings, data providers and by other stakeholders;
- Avoid the use of complicated graphics and keep your sustainability-related disclosure and language simple so that relevant information can be captured by AI-enhanced technology; and,
- Embark on annual ESG roadshows to communicate your ESG story.
