The Problem with Assessing How ESG Companies Perform

Without a uniform code of environmental, social, and governance ratings, ESG stock performances have been inconsistent with how data providers have been rating them.

A closer look at the ratings and performance of stocks ranked by Refinitiv, a data provider owned by the London Stock Exchange Group, index provider MSCI Inc., and Sustainalytics, a unit of Morningstar Inc., reveal that companies can have widely disparate rankings, the Wall Street Journal reports.

Those defined by Refinitiv to be poor performers on ESG metrics have rallied 26% since the start of 2021, whereas companies with the top ESG metrics rose by 14% during the same period.

According to Sustainalytics, the top-rated ESG companies gained 26% over the same period, outperforming those with lower ratings.

Meanwhile, according to MSCI, the average companies based on ESG scores were the best performers, beating out both the poorest and the best ESG-rated companies.

Nevertheless, the group of 494 large cap companies analyzed by the WSJ outperformed the S&P 500 and the Dow Jones Industrial Average as a group so far this year.

The varying results are attributed to the disparate data sources and procedures among the three providers, which often focus on different aspects of the companies’ behavior. For example, one methodology assigns scores relative to competitors in the same industry, whereas another assesses absolute risk based on a firm’s material exposure to ESG issues.

“Many of our institutional investor clients require multiple, diverse viewpoints on ESG to help them make more informed decisions,” Sustainalytics executive director of methodology and portfolio research, Hendrik Garz, told the WSJ.

Investors, though, should keep in mind that ESG criteria are better known for their long-term performances, so the short-term data should be taken with a grain of salt. Elena Philipova, director of sustainable finance at Refinitiv, argued that the rankings reward companies that develop plans to minimize risk in areas of long-term trends, like climate change.

“This is about long-term management on a much longer-term agenda like decarbonization and human capital,” Philipova told the WSJ.

Guido Giese, executive director of MSCI Research, noted that research has shown that companies with better ESG scores typically have better earnings over a five- to seven-year period than those with lower ESG scores.

“If you want to listen to the music of ESG, you need to switch to the long-wave radio,” Giese told the WSJ.

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