Managing ESG Data and Rating Risk

Assets in sustainable funds hit a record high of USD 1,258 billion as of the end of September 2020, with Europe surpassing the USD 1 trillion mark according to Morningstar’s research. The increased integration of Environmental, Social and Governance (ESG) factors into investment decision-making, whether it be for active or passive investment styles, has made the quality and availability of well-structured and digestible data provided by ESG rating and data agencies ever more important.

The growing influence of ESG data and ratings on the allocation of capital will undoubtedly bring with it increased scrutiny. Two main areas that have drawn media attention and investor criticism towards ESG ratings providers are: (1) their focus on past performance and lack of predictive value over future performance; and (2) the sometimes-diverging opinions of ESG ratings providers for the same company.

The lack of global reporting standards and agreement on what should be deemed as material for each sector has led to ESG data and ratings providers each adopting their own methodologies and processes, making it difficult for companies to manage their narrative on sustainability and determine how best to allocate internal resources regarding sustainability reporting. Further complicating the landscape for companies is the fact that a growing number of investors are developing their own ESG ratings by leveraging multiple data sources.

Given the increasing importance of ESG data and ratings, for this Progress Group, Anna Hirai (Co-Head of ESG Research) and Andrew Brady (Senior Analyst) of SquareWell Partners (“SquareWell”) interviewed representatives from companies, institutional investors, ESG ratings and data providers, and academia. We have split the Progress Group report into two sections where we provide: (1) an overview of the ESG data and ratings landscape; and (2) key takeaways for companies to navigate this increasingly complex market force.

You can access Harvard Law School’s post here.