ESG ratings
son why such analysis typically focuses on larger businesses. Differing opinions
The starting point to selecting a ratings provider is to decide what you want to measure. Are you interested in the impact ESG has on valuations? Or, the impact a company has on the planet.
It appears that taking an individual approach could be the best option, as using a rating that combines several factors may not work. “This can make it generic and meaningless, because dif- ferent variations produce different outcomes,” McAllister says. With so many different metrics being considered and by so many providers, it is no surprise that you get different viewpoints. But low correlation of opinion is also evident when assessing companies on mainstream issues. McAllister points to there being 100 years’ worth of accounting standards, auditing and infrastructure on the traditional financial metrics, but you still end up with broadly half of the analysts saying “sell” and half saying “buy”. “There are long-term and complex sets of issues to analyse in ESG, so it should come as no surprise that there
can be a wide variety of views on the same company,” he adds. It appears that the differences in this area run a lot deeper. “Low correlation not only comes from rating companies look- ing at different issues, there is no consensus on which metrics to use to measure performance on the different topics,” Zand- bergen says. So there are many issues to consider when employing such scores in your research. “If you run data from one provider on a company’s ESG profile, you will get a different picture from running another provider’s data,” Manuel says. “You can’t just pick one off the shelf believing that rating systems A, B and C are pretty much the same, because they are very different.” This could be where additional expertise might be useful. “This is where an active manager may have an advantage in that they can unpack the ESG rating or score and focus on what is mate- rial to their investment decision-making process,” Childe says.
It is difficult to accurately reflect the sustainability profile of a company in a simple score. It is not an exact science. Masja Zandbergen, Robeco
Aware of the awareness Putting an ESG score on companies is not a new initiative. The SAM ratings that Robeco use were originally developed by RobecoSAM more than 20 years ago. Their creation was a response to a general absence of ESG data, and over time they filled in the gap left by the lack of focus on financially-material sustainability issues in subsequently launched ESG data sets. “We want to be sure that we are focused on the ESG topics that are financially relevant,” Zandbergen says. Also setting its own scores is Aon, although its ESG ratings are for fund managers. They assess a manager’s awareness of ESG risk and how well they factor that into building portfolios. The system is simple. Managers with low awareness are giving a 1 rating and those with high awareness are awarded a 4 rating. The firm has 100 people across the world spotting the most suitable managers for its clients’ needs. “Our ESG ratings pro- cess is an extension of that broader research process,” Manuel says, who describes assessing the capabilities of fund manag- ers as the firm’s “bread and butter”. “We want to see ESG considerations feature throughout what a manager does, from their investment philosophy, to their pro- cess, to the way they incentivise their people, to the way they assess risk and demonstrating that through to the portfolios that they build.
“Our ESG ratings are an assessment of process,” Manuel adds. Significant revisions to ratings are usually made annually, when companies typically disclose information about their operations. There are also quarterly tweaks based on news- flow, such as a scandal, but the main changes are made annually.
“Quant investors find ESG the slowest-moving dataset in the world,” McAllister says, adding that resilience is a characteris- tic that sustainability-focused investors need because ESG
34 | portfolio institutional March 2020 | issue 91
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48
