ESG ratings and analyses provided by independent research firms can help investors to better understand ESG risks related to their securities and their portfolios. However, these metrics have several shortfalls that make them difficult to use. They are not always objective and the data they are based on may be unreliable.
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Some of the data used to compile third-party ESG scores and ratings may be subjective. Other data may be objective in principle, but are not verified or reliable. Third-party scores also may consider or weight ESG criteria differently, meaning that companies can receive widely different scores from different third-party providers.
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Note that ESG ratings can vary depending on the provider due to the different methodologies, metrics, data and weightings they use. Most investors find this confusing and difficult to compare. According to think tank SustainAbility, rating systems often challenge and frustrate investors.
Investors interviewed expressed strong critiques of ratings, from inaccuracies and use of old or backwards-looking data, to more fundamental concerns about whether ESG performance can ever be distilled into a single score.
How should you use ESG ratings in your investment decisions?
When making investment decisions, you should always use various data sources. The same applies to ESG investing. Corporate ESG ratings, direct contact with companies, corporate sustainability reports, and in-house research are the top sources of ESG information, according to a study by SustainAbility. You can also check out ESG index providers and some online ESG tools. Some of them are even free.
A breakdown of the ratings into environmental (E), social (S) and governance (G) factors, and even sub-categories can be a great way to analyze ESG ratings. This in-depth analysis can shed more light on companies' sustainability strategy, practices and programs while it can also position them within their broader sector.
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ESG Rating Providers
Major ESG rating providers
The biggest ESG rating providers are considered to be MSCI and Sustainalytics, mainly due to their wide coverage. Bloomberg, and Refinitiv (formerly Thomson Reuters) as well as credit ratings agencies like Moody’s, S&P and Fitch also provide ESG ratings.
MSCI ESG Ratings
MSCI ESG Research, one of the world’s largest ESG research provider, publishes ratings and research on over 14,000 equity and fixed income issuers.
Sustainalytics’ ESG Risk Ratings
Sustainaliyics, a Morningstar subsidiary, offers data on 40,000 companies worldwide and ratings on 20,000 companies and 172 countries.
Bloomberg ESG Disclosures Scores
Bloomberg offers ESG data for more than 11,800 companies in over 100 countries, organised into 2,000 fields. Their ESG Disclosure Scores rate companies on their level of ESG disclosure and span key sustainability topics, including climate change, human capital and shareholders’ rights.
FTSE Russell’s ESG Ratings
The ratings include 7,200 securities in 47 developed and emerging markets. ESG Ratings consist of an overall rating based on underlying pillars, theme-based exposures and scores.
ISS Ratings and Rankings
ISS (Institutional Shareholder Services), majority owned by Deutsche Bourse Group, provides company, country and fund ratings as well as data and analysis across the full range of sustainable investment issues, including climate change, human rights, labor standards, corruption and controversial weapons.
CDP Climate, Water and Forest Scores
CDP, a not-for-profit charity, provides environmental data, research and tools to investors. Its Climetrics rating helps investors find funds that invest in companies that are better at managing material issues related to climate change, water security and deforestation. Climetrics rates almost 20,000 funds, the ratings are public and can be searched for free.
S&P Global ESG Score
The ESG scores of 7,300+ companies are calculated based on company answers to S&P’s own Corporate Sustainability Assessment (CSA) and/or publicly available data. Each participating firm is assessed using almost 1,000 data points.
Moody’s ESG Solutions Group
Moody’s ESG Solutions Group, a business unit of Moody’s Corporation, provides ESG and climate risk solutions including ESG scores, analytics, Sustainability Ratings and Sustainable Finance Reviewer/certifier services leveraging Moody’s data. The group includes ESG ratings firm V.E (Vigeo Eiris) and climate data company Four Twenty Seven, both acquired in 2019.