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The Difficulty With ESG Ratings

October 07, 2021

We have sat through numerous client meetings discussing ESG investing (Environmental, Social and Governance). Some people are surprised that a certain company is included while others are perplexed why another company is excluded.

At least six different vendors create ESG standards for portfolio construction but there is no one standard. Elroy Dimson, Paul Marsh and Mike Staunton published a study, “Divergent ESG Ratings” published in the November 2020 Journal of Portfolio Management.

They found most institutions use external data to make investment decisions. Yet, in many cases a high score from one provider can be a low score from a different rater.

Example: Facebook is rated in the 1st percentile by Sustainalytics yet MSCI ranks them in the 96th percentile.

The study identified multiple differentiations in ratings. How we view the disparity is to utilize mutual fund companies that specialize in ESG investing and have for years (before it became popular) and exchange traded funds primarily using MSCI as the rate (Blackrock’s iShares). Until one standard is applied to all companies, this type of disparity will continue.

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