One of the largest issues facing the ESG market sphere today is the lack of coordination both among ratings providers and among data providers. Many companies are rated based on varying aspects, with different weights being placed on each category by the raters. At a time when, due to the growing popularity of impact investing combined with advances in AI and machine learning, there is unparalleled data available for ESG raters, it is easy to see how this could be overwhelming for a relatively new industry.
This has caused some of these ratings to suffer a perceived loss of credibility for investors, as there isn’t a clear answer as to which ratings are best. In this article, we are going to explore not only the different methodologies used by ratings and data providers, but also where exactly the discrepancies lie and how RS Metrics can help alleviate these issues.
Results of a State Street Global Advisors study showing the correlation across the coverage universe between ratings agencies (1 is complete consistency):
ESG ratings agencies compile ratings based on a host of factors, varying from agency to agency. Some focus only on environmental issues while others place equal value on social and governance issues. The weightage of the various issues which can fall under the vast ESG umbrella is also up for debate, with each company choosing to allocate weightage differently. While many of these issues require increased coordination among ratings agencies, data providers can also have a tremendous influence on standardizing these ratings systems.
There is an incredible amount of ESG data available to ratings agencies and to risk managers who have the time to pore through it. Companies use a combination of AI and trained analysts to pore over tens of thousands of articles and documents in over a hundred different languages to provide detailed analysis and breakdowns of recent events. These reports detail issues both directly related to ESG and also related to other major events which could indirectly impact regional ESG issues. At the end of the day, however, one major key characteristic of all this data is that it is publicly available data, data which may not always tell the whole story and can be swayed by the provider of the information. This is where RS Metrics’s product ESGSignals can step in and revolutionize the ESG investing sphere.
By using satellite and drone imagery to provide consistently up to date, objective third party data on publicly owned companies’ operations at thousands industrial locations, ESGSignals allows investors and raters to assess physical & transition risks of the assets the companies own globally. ESGSignals provides weekly measurements on a company’s GHG emissions, water stress risk, fire hazard, land usage, environmental impact, employment, clean energy, and production and raw materials usage to hold companies accountable and add credibility to ESG investing.
Until we see more consistently reliable data which is not influenced by external forces such as the media or the whims of the companies being rated, it will be very difficult to create credible, standard ratings. RS Metrics is the global leader in satellite analytics, and has therefore decided to do its part in providing third party information to raters and investors. This may be the breakthrough the ESG investing sphere has been waiting for.
Written by Vivek Sharma