Sonya Dreizler, a subject matter expert on ESG and Responsible Investing, speaks with Gabe Rissman, Co-Founder & President of YourStake.org as part of this ESG University series that explores the Data Behind ESG.
In this segment Sonya and Gabe discuss ratings and methodology and how to make sense of the discrepancies from company to company.
ESG ratings and methodologies vary widely from company to company. Why do we see such a wide variety on the company level and the consolidated mutual fund or ETF level?
Luckily I don't have to produce the insights myself there is a great paper that came out of MIT called Aggregate Confusion, and it focuses on the divergence of ESG ratings, and it identifies a few different problems and challenges that lead to this discrepancy. And those challenges lie around how data is collected the scope of the data that's collected and the weightings of different data points and how important those weightings are. Because of these differences about every six months, there's some article that blows up about how there's an ESG ranking that puts a tobacco company and a mining company in the top five of all ESG companies.
What kind of data or methodology would lead to tobacco or mining company being at the top of the list? That could come from two primary things, the first is that if a company has a lot of really good policies. A lot of times the companies that have the best policies are the companies that are doing the worst things and need to cover themselves from the legal perspective. Other times, it just depends on a person's view of positive impact. So there might be certain people that are totally fine with a tobacco company and they love that this tobacco company has a diverse leadership team.They love that this company treats its workers well they love this company as a good climate policy, maybe science based targets and the business model and operations of tobacco maybe this person is a smoker and thinks it's fun.
On the other hand, someone that might care about diversity and climate change and human rights also, but maybe had a family member that died of lung cancer from smoking, all the other stuff goes out the window if it's a tobacco company then that's the primary thing that matters to them, and that business model makes the company, not ESG or not impactful in their minds. So, having a rating agency essentially determine what values are important can work from a risk management perspective and that's kind of how ESG data is defined and constructed.
It's managing environmental, social and governance risks, based on what metrics are material to accompany, but that's actually very different from positive impact, and that's what we focus on at YourStake. It's the positive impact and regardless of how much a company's reducing its risks. People have very different views of what positive impact means and what society they want to see, and how they want the world to be. It's strictly impossible for that to exactly align with a rating agency's methodology so that's why there's a lot of disagreement among rating agencies as well as disagreement among the agencies and then the people that are looking at and consuming the data.