Last month I wrote about a threatening letter from outgoing Senator Pat Toomey to ESG ratings organization Sustainalytics. This was but one ESG rater that received the letter. FoxBusiness reported that similar letters were also sent to MSCI, ISS, Bloomberg, Moody’s, Carbon Disclosure Project, S&P Global, FTSE Russell, RepRisk, FactSet, Refinitiv, and Arabesque S-Ray. About a week ago, the CEO of ESG Book (part of Arabesque S-Ray) published his response to Toomey’s position in Fortune. CEO Daniel Klier began by partially agreeing with Toomey:
“Despite the politicization of ESG, Sen. Toomey is right: We do need more transparency in sustainability ratings. Transparency is a force for good: The rapid growth of ESG investing in recent years has in large part been a result of greater availability of non-financial corporate data. We now have access to more information on companies than ever before. And there is a long-established link between positive non-financial corporate performance and better returns.”
Then Klier points out his view of problems with the Senator’s attack:
- The lack of “clearer frameworks, more consistent reporting from companies, and collaboration and conversation between corporates and investors.”
- “ESG reporting is largely non-mandatory in the U.S., which means companies decide what to disclose and have different ways and formats of releasing data… That makes ESG reporting haphazard, with ESG raters parsing this data through their own, often opaque, methodologies to produce ratings.”
- “…the data we’re looking at is largely unorganized and expressed in different ‘languages’ or frameworks with different indicators. If companies aren’t measuring in the same format or even the same measurement markers, how can ratings agencies interpret the data properly?”
He then brings it home:
“We need a framework for measuring ESG that avoids subjectivity and provides a space for companies to own and engage with their scores. We need clear guardrails for the U.S. market, so that companies are tracking towards similar goals. And investors need tools to make choices about what non-financial data they integrate in investment decisions, not biased ratings that judge or pre-determine the outcome.”
In my view, Klier’s letter has two interesting points that may not be terribly obvious:
He is asking to be regulated. That isn’t something you see everyday.
He admits that some raters – at least his own company – are using data they have low confidence in and to which they apply “opaque methodologies.”
Reporting companies may not have much say in ratings methodologies at the moment, but they have a great deal of control over the quality of self-reported voluntary data. Although I think rating organizations should make meaningful efforts to validate data on which they rely (especially when they suspect data may not be accurate), companies originally reporting that data should also consider this when developing and reporting it out. Companies may be tempted to take less costly and lower effort approaches to ESG reporting by not ensuring its accuracy, given the current voluntary nature of ESG disclosures. But the self-reported data also forms the basis of ESG ratings that then are used by a wide (and growing) audience. Companies may want to reconsider their assessment of the importance of ESG data reporting practices, processes and QA/QC methodologies. We have checklists and Guidebooks on data validation that can help.
