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The ESG Data Challenge

ESG rating services are essential for investors. However, there is a huge variance between them. In this article we will discuss the problem and how ESGgo can help you.

ESG rating services are essential for investors. However, there is a high variance between them. A good example is America’s most valuable automobile company – Tesla. MSCI ranks it at the top of the car industry for sustainability, whereas FTSE ranks it as the worst car producer globally. Yes! You read it right. Tesla is both the best and the worst. One rating agency claims “It’s the best” while another is putting it in last place. The discrepancy reflects the fact that MSCI judges Tesla to be almost perfect on carbon emissions because of its clean technology, while FTSE, which evaluates factory emissions, regards the firm as a serious offender. In this post we will see what are the characteristics of this challenge and how ESGgo platform can help to address them.

The Dissimilarity in ESG Rating

The divergence in rating across large companies is quite surprising. If we look at Facebook (at Figure #4) we can see that on the Environmental pillar they are ‘the best’ if we choose MSCI however, if we ask Sustainalytics the answer is “they are the worst”. The same thing is going on with JPMorgan Chase, J&J, Wells Gargo and Pfizer on the Governance pillar.

Data at Variance

There are four factors that give rise to inconsistencies across ESG rating services:

1. Data discrepancies - There is a significant variety of the metrics that purport to measure much the same thing. The diversity of measures gives rise to considerable dissimilarity in ratings reflecting firm-specific attributes, differing terminologies, metrics and even the units of measurement.

2. Benchmark choice - There are differences in how raters define the benchmark for comparisons. For example, Sustainalytics compares companies to constituents of a broad market index, whereas S&P compares companies to industry peers.

3. Data imputation - at the company level, ESG ratings are plagued by missing data. When a company does not reveal metrics, some ESG raters assume the worst and assign a score of zero. Other raters give it a score that reflects peers that do report the data. Don’t ask me why.

4. Information overload - reflecting the never-ending expansion in the volume of public information and the lack of consensus on metrics, there is greater scope for raters to disagree about the scores for particular companies.

How ESGgo Can Help

As we recognized these challenges, we wanted to help companies cope with it. This is why ESGgo is building the (first-ever) enterprise operating system for ESG. It is a one-stop-shop solution for achieving ESG leadership and understanding better where your organization stands. It will give you clarity on your own metrics and on how you are doing vs the competition. Let’s see how our system can help you with each data challenge:

Data discrepancies - Since there is a variety of metrics that purport to measure much the same thing, we are collecting data from different sources. In the system you will be able to slice and dice the data and see how each data provider is ranking your organization. In other words, you will be able to translate on the fly the different rankings and see the aggregate result.

Benchmark choice - You will be able to decide what is the most accurate benchmark for your company. This will help you when making decisions and improving the current state on the environment, social and governance pillars.

Data imputation - at the company level, ESG ratings are plagued by missing data. With our system and experts you will be able to close these gaps and provide your stakeholders a full picture.

Information overload - As there is an expansion in the volume of public information and a lack of consensus on metrics it’s hard to find the signals. ESGgo system will help you get meaningful signals from the noise that there is out there. It’s a combination of our experts and our proprietary AI/ML engines. The platform will provide tailored recommendations for setting targets, enhancing practices, and improving ESG standing.

If you wish to learn more about ESGgo platform - please contact us here.

ESG Rating Disagreement and Stock Returns