ESG Investing Part 1: Multiple Ratings Cause Confusion
A recent (mid 2019) survey found the biggest barrier to ESG investing is the “lack of consistent ESG data”. If the same corporate has different ESG ratings from different sources, which one should be used? What causes the difference in ESG ratings? This research is based on meta-analysis of other published research to try answer these questions. It finds that the average correlation among the different ESG ratings tends to be ~55%, with the correlation tending to be highest in the Environment pillar and lowest in the Governance pillar. The analysis looks at the key differences in methodology to identify the sources of the difference amongst ESG ratings. It provides thoughts on the additional homework that end-users should do to find ESG ratings that provide information value-additive to their existing in-house analysis. The difference in ratings may be an opportunity, and not a hurdle to ESG investing.