An improvement we are seeing is that the volume of compa- nies covered by the various providers is growing. More compa- nies are reporting data so there should also be better data feed- ing into the scores. Ultimately, you have to recognise that different scoring provid- ers are trying to do different things, and we are not going to coalesce around a single view of the right ESG score for a com- pany. In that sense, we are not going to see scores that meet unrealistic expectations. Campbell: People often try to measure different things. It is great that there are disagreements as you do not want everyone to come out with the same rating. Roberto Rigobon of the Massachusetts Institute of Technology has some good research on ESG scores. Even on things that are relatively basic, like keeping chairman and CEO roles separate, the correlation between providers is low. I have seen it as 0.6 or lower in some studies. If they cannot agree on basics like that, then on matters of greater judgement I do not have mas- sive confidence. Sometimes there are also institutional limits on what they can do. Some of them, with the best will in the world, have tried to come up with accounting quality scores, which can be useful for investors. But they do not publish what goes into those account- ing quality scores. That then becomes an unhelpful black box. McAllister: A US politician said he wants an ESG label to be as clear as buying full-fat or semi-skimmed milk. Looking across the different ESG issues, across different time horizons, for- ward looking, backwards looking – there are so many points of judgement that it is never going to be as simple as a full-fat milk distinction. Jones: Where I expect to see the market developing is better transparency of the methodologies used. That makes it easier for investors to dig beneath the surface. Jackson: We forget sometimes why these problems occur. If you think about an index, instead of being like a toothless sys- tem spitting out numbers at the press of a button, it is some guys in an office who have been given a deadline by a corporate that has to get a product out to meet their profit target for the quarter.


They have gone through a procurement process to get data to calculate those numbers. But by the time they have sat down to do the analysis, that data has been superseded by something better. But they cannot go through the procurement process again because it has been signed off by the senior managers in the index provider company.


They are using a dataset that analysts do not particularly want to use and there is a deadline next week. There are real people having to make real errors.


The limitations come down to there not being that demand for transparency. If companies that provide some of these indices


16 October 2022 portfolio institutional roundtable: Responsible investing


were held more accountable on transparency, that could drive higher quality within the entire process.


If you use them as a starting point to help you get somewhere, you can then start to engage, dig deeper into the data and over- lay potentially more sector specific datasets. If you have the time and capacity. Gopinathan: Standardised ESG scores as a business has proven to be a case of the tail wagging the dog. You know that you do not have full disclosures from companies, you know you do not have proper audits on these numbers. There is time pressure to make estimation decisions and sell product. With respect to the underlying analysis, the output scores are based on poor data and assessments, a lot of subjectivity, which has been forced into a model. That is dangerous in some ways.


On the bright side, there is a lot of good progress happening on the disclosure side. We have the TCFD, International Sustain- ability Standards Board and more emissions and transition planning disclosures. It needs to move forward to a point


Engagement is a tool to make a good investment, a better


investment. Claire Jones, Lane Clark & Peacock


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