Money managers complain it is challenging to compare companies’ environmental, social and governance risks, as well as differences in ratings among ESG data providers.
In assessing companies on ESG, the data providers often “look at different things and …weight those things differently,” said Ben Yeoh, London-based senior portfolio managers, global equities, RBC Global Asset Management.
At least two of the big ESG data providers agree only 55% of the time, Mr. Yeoh said.
“So a lot of this stuff is not what I would call ESG fact,” Mr. Yeoh said. “It’s more ESG opinion.”
Regarding the complaints, Linda-Eling Lee, global head of ESG research at MSCI Inc., New York, said: “We’ve heard that, too.”
MSCI, for example, takes a different view from other ESG data provid¬ers “in terms of weighting what ESG factors should matter,” Ms. Lee said.
Doug Morrow, Toronto-based associate director of thematic research, Sustainalytics BV, offered a different view.
“In the past, on the E and S side, fact-based insights were harder to come by given there was less company data available, however that’s no longer the case.” Mr. Morrow said. “We have seen increased transparency when it comes to disclosure on the part of companies.”
“We still have a long way to go in both terms of data quantity and quality,” he said,” but corporations are responding to increasing demands from investors for improved transparency. Nearly 2,000 listed companies worldwide currently measure and disclose their (greenhouse gas emissions) and energy use, for example. It’s true that some measures of corporate E and S performance are still not broadly disclosed — for instance, lost time injury rate or employee turnover rate — but the trend is still positive.”
On differences in scoring among ESG data-providers, Mr. Morrow said, “Deviations can emerge from differences in models, including ... weights and the peer set against which companies are scored.”
To aid its portfolio managers, RBC is rolling out an internal analytical tool pointing out the differences in the data providers’ scoring, Mr. Yeoh said.
The quality of ESG data “depends on which type of metric you are talking about,” Ms. Lee said. “Data in this area has always been difficult to get and make sense of, and to normalize and make comparable. We’ve made huge strides in the last couple of years in improving the ability to have data be meaningful. That’s partly because there is a little bit more disclosure around some of these metrics. But mostly because I think the modeling and estimating in this area has gotten so much better.”
One metric that is of interest to clients is the percentage of their portfolio that has exposure to high water-stressed areas, Ms. Lee said.
“No company is actually reporting necessarily on how much water they are using and where they are actually using it. What we have been doing (is to do a) good estimate of how water intensive their operations are. We overlay it against these water-stress maps that are being produced by academics and by governments, and then we are able to say for that particular company what percentage of their assets is actually exposed to high (water-stressed) regions.”
“On E and S, there is probably growing acceptance certainly on the E side … because the data tends to be more quantitative, people think it is a little bit more robust or fact based,” she said. “There is a little bit of a bias just because the data comes in the form of a number … At the end of the day it only makes more sense if you can compare one number against peers. There are still a lot of differences in how companies report, for example, their injury rates.”
In terms of new ESG factors MSCI is examining, Ms. Lee said MSCI has added corporate tax transparency, or tax gap in what a company pays in a region compared to “what you might expect.”
“Clients are interested in that as an actual financially material exposure,” Ms. Lee said.
Among ESG issues “that have become less prominent” is electronic waste and conflict mineral sources, Ms. Lee said. “Some of these things we think of higher risk because there may be regulatory attention … coming. Once the regulations come in and companies actually comply, then you have less reason to have it in a ratings model.”