Manulife Inves… - Tue, 05/09/2023 - 01:06

ESG ratings and data: From misalignments to global standards

Environmental, social, and governance ratings and data provided by professional services firms are fast becoming an essential part of the sustainable finance market infrastructure. But these ratings seem to shed as much light as they provoke confusion. We take a look at the current state of ESG ratings, consider some of the factors driving differences among competing rating providers, and offer a view on the future of these tools.

Environmental, social, and governance (ESG) ratings have risen in importance as a disclosure tool and are often used to promote issuers and products using individual and aggregated scores. While they’ve been a focus for marketing (e.g., firm X has a AA ESG rating), many investment firms rely in a more limited way on ratings as a direct input to their investment process. While we believe they can provide unique sustainability-focused insight, their proliferation and widely disparate results have raised questions about their utility.

To be sure, there are good reasons for these differences, which we address below. But because the differences among ESG ratings aren’t well understood by issuers, asset managers, investors, and other market stakeholders, we think it’s important to discuss why they’re different as a prelude to discussing how they should be used and how this field should develop.

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