ESG scores: Why consensus-based scores are the best

Environmental, Social, and Corporate Governance, collectively referred to as ESG investing, is a strategy that invests in companies with a positive contribution to establishing a better future for our society and the planet. Some institutional investors have strong constraints on specific ESG metrics which call for tailored approaches to ETF selection. However, many personal investors might find generic ESG scores helpful to make comparisons and select the right ESG ETF.

1. Who provides ESG scores?

There are more than 125 ESG data providers[1] around the world striving to impose their own ESG methodology as the industry standard. The ESG data sector has recently seen an increase in acquisitions by industry giants. Morningstar, S&P, Solactive, Factset, Nasdaq and Moody’s all bought specialized vendors over the past two years[2]. By contrast, MSCI has its internal research team calculating their ESG scores, which is then used by its own index products and Bloomberg Barclays Fixed Income indices range.

Each ESG data provider has its own metrics to identify what are ESG matters. They source this data differently too. Most of them get the data directly from public sources such as companies’ reports. Some also conduct interviews with the stakeholders or send questionnaires. Some even claim to be able to capture the unstructured ESG data with Artificial Intelligence technology. After collecting this data, ESG scores providers categorize and weight them with their proprietary in-house process and eventually put together a final ESG score.

2. ESG Scores are different across providers

ESG ratings find their limit in that they are merely an opinion on the ESG-ness of a specific company. And different providers might have different opinions. This means ESG providers might come up with contradicting ratings for the same company.

A study of SSGA[3]  shows that ESG scores can be tremendously different across ESG data providers (see figure below). This is problematic for personal investors basing their selection on an ESG score provided by a specific house, as their selection may be seen as a poor choice in the lens of another ESG house. In some cases, investors might even become victims of "greenwashing" without them realizing it.

3. Why we believe a consensus approach is best

Can investors avoid buying controversial ESG products? They often do not have the time or skills to study the details of the various methodologies of all ESG score providers. A great exercise is to seek common ground while shelving differences. We believe consensus-based approaches can help investors in their ETF selection. Those approaches are based on the ESG experts’ average opinion on a company and the divergence (or convergence) of those opinions.

By choosing to use a consensus score, investors benefit from the insights of the whole industry instead of limiting their scope to a single house’s ESG philosophy – which might not be in line with the rest of the industry.

At Trackinsight, we provide consensus-based ESG scores designed by our partner Conser, a Swiss-based independent ESG verifier, on more than 3,500 ETFs worldwide. Trackinsight’s screener makes it possible to filter the universe by ESG score or specific impact goals (United Nations’ Sustainable Development Goals). ESG opinions on ETFs holdings are displayed on each fund’s page (see screenshot below).

Check how your ETF scores in the light of industry consensus: www.trackinsight.com

[1] According to the Global Initiative for Sustainability Ratings

[2] Source: Bloomberg Webinar - The Future of Sustainable Investing

[3] Source: The ESG Data Challenge (ssga.com)