Metrics and Markets
SRI / ESG

An examination of the relevance of ESG ratings for SRI decisions from a market perspective and identification of the dynamics that will affect the development of the ESG ratings industry in the future.

Burgess COMMENTARY

Peter Burgess

Abstract:

Institutional investors are becoming ever more aware of the potential risks and opportunities associated with environmental, social and governance (ESG) factors. From natural resource scarcity to changing governance standards, from supply chain and labor management concerns to evolving regulatory landscapes, it has become increasingly important for socially responsible investment (SRI) professionals to understand the ESG profile behind the assets they are managing. Hence, the access to relevant, consistent, comparable, balanced and reliable ESG information has become a prerequisite for asset managers to take the right investment decisions.

The financial services market has responded to this need by producing specific ESG ratings, rankings and indices. These services serve asset managers of SRI portfolios with the analytical information they would need to assess the ESG performance, risks, and opportunities of assets-under-management (AUM).

The objective of this research paper is to examine the relevance of ESG ratings for SRI decisions from a market perspective and to identify the dynamics that affect the development of the ESG ratings industry in the future.

Research Interests: Corporate Social Responsibility, Sustainable Development, Corporate Sustainability, Triple Bottom Line, CSR Reporting in Banking Sector, and 24 more

Academia.edu Search... HOMEANALYTICS SESSIONS UPLOAD 99+Peter Burgess The Significance of ESG Ratings for Socially Responsible Investment Decisions - An Examination from a Market Perspective Michael Laermann UPLOADED BY Michael Laermann VIEWS 306 INFO less DOWNLOADED Abstract: Institutional investors are becoming ever more aware of the potential risks and opportunities associated with environmental, social and governance (ESG) factors. From natural resource scarcity to changing governance standards, from supply chain and labor management concerns to evolving regulatory landscapes, it has become increasingly important for socially responsible investment (SRI) professionals to understand the ESG profile behind the assets they are managing. Hence, the access to relevant, consistent, comparable, balanced and reliable ESG information has become a prerequisite for asset managers to take the right investment decisions. The financial services market has responded to this need by producing specific ESG ratings, rankings and indices. These services serve asset managers of SRI portfolios with the analytical information they would need to assess the ESG performance, risks, and opportunities of assets-under-management (AUM). The objective of this research paper is to examine the relevance of ESG ratings for SRI decisions from a market perspective and to identify the dynamics that affect the development of the ESG ratings industry in the future. Research Interests: Corporate Social Responsibility, Sustainable Development, Corporate Sustainability, Triple Bottom Line, CSR Reporting in Banking Sector, and 24 more 1.$,, e*perts globally for this very p!rpose. 2o&ever/ even tho!gh CR)s traitionally have been consiering material ESG factors as part of their holistic assessment approach/ they foc!s on creit ris% rather than on ESG opport!nities. D!e to the @iss!er paysA pricing moel/ &hich gives !sers free access to rating res!lts/ CR)s c!rrently o not ta%e stoc% in complementing iss!ers profiles &ith more comprehensive ESG information. Material ESG ris%s are incorporatein the overall rating analysis an th!s only reflect a etail of an iss!ers ESG profile from a creitrating perspective. Conse3!ently/ CR)s o not provie stan4alone ESG assessments or an holistic overvie& of an entitys long4term ESG potential. Moreover/ the final rating score oes not necessarily reflect the impact of ESG consierations beca!se even in instances &here ESG ris%s have material implications/ the creit impact may be mitigate by other factors li%e financial strength. /MooyGs* p- 7 Despite the incorporation of ESG factors in their rating methoologies an their potential to evolve into an integrate rating provier/ the leaing CR)s at this stage o not isclose any specific ESG4relate information in the rating profiles p!blishe on their &ebsites. The research/ analysis an rating of ESG4specific information remains the e*pertise an core b!siness of traitional ESG rating firms/ &ho nee to aapt their services to s!pport asset managers in their manate to con!ct a more active SRI approach li%e ESG integration or engagement.$. Concl!sionsThis research paper ientifie some of the factors that affect the significance an mar%et potential of ESG ratings. It o!tline a n!mber of factors that impee ESG ratings from eveloping f!ll mar%et potential/ confining them to be a non4bining inicator rather than a conventional reso!rce for SRI portfolio management. 9ne of the reasons is the proliferation of the ESG rating mar%et an techni3!es/ &hich is partly !e to the absence of common stanars an the strategic interest of ESG rating proviers in conserving proprietary rating methoologies to protect a competitive ege. Despite consierable progress of self4reg!lating programs to promote common frame&or%s an stanars for ESG reporting 0GRI/ IIRC/ acco!nting 0S)S?/ research an rating 0)RIST)/ GISR or SRI 0HRI/ ?S IS9 ##### #, / these initiatives are of vol!ntary nat!re/ &hich leaves asset #,?S IS9 #####:#,,+ is an international 3!ality stanar for personal financial planners service by - ##  managers free to ecie on ho& to e*ec!te their SRI strategies. D!e to the confiential nat!re of investment strategies it remains iffic!lt to assess to &hich e*tent asset managers implement ESG factors in their act!al b!siness practice to meet c!stomers manate.)nother critical parameter is the valiity an ass!rance of ESG information. Even tho!gh the vol!me of p!blicly available ESG ata is constantly rising/ the 3!ality of the isclose information is epening on the iss!er  s!ch as a company 4 an the valiation by an assessor/ s!ch as an ESG research firm. D!e to a limitation of legally bining r!les/ ESG isclos!re oes not necessarily feat!re materiality aspects or preictive ata/ an th!s bears the ris% of being incomplete/ inconsistent an iffic!lt to compare bet&een ifferent in!stries/ mar%ets/ an rating schemes. To compensate for this eficit/ it &o!l re3!ire an active investigation approach/ &hich ESG research proviers/ analysts an asset managers !e to constraints of reso!rces can only perform to a limite e*tent.)t the same time/ the significance of the s!stainability information mar%et is favorably impacte by the SRI mar%ets o&n moment!m an the tren to&ars ESG integration an active ste&ar4ship in partic!lar. ;hile larger financial services companies !s!ally have s!fficient reso!rces to perform proper ESG research an analysis/ the act!al challenge is more for asset managers at smaller investment firms/ as they nee to evelop s%ills to b!il an manage SRI portfolios moreeffectively to meet their manate. ESG rating scores for them constit!te a complementary reso!rce for stoc%4pic%ing e*ercises an portfolio management. (rom this perspective/ the eman for ESG rating services is rather riven by proper mar%et ynamics than by e*ternal reg!lation. This is inicate by an ongoing mar%et consoliation/ the creation of strategic alliances/ an the la!nch of ESG4specific pro!cts by establishe financial players li%e stoc%4e*changes/ ine* proviers/ m!t!al f!ns/ an CR)s. If the latter &ere to isclose comprehensive information of material ESG criteria in a more etaile &ay/ asset managers &o!l have a simple b!t reliable rating reso!rce to ra& on &hen managing SRI portfolios. 2o&ever/ as CR)s foc!s on material ris% factors only/ asset managers nee to perform proper research or ra& on e*ternal service proviers to have these insights available to perform an active ste&arship approach. This manate necessitates irect company engagement/ &hich represents a ma6or eneavor for analysts/ asset manager an e*ternal ESG rating proviersali%e. Stanars International Lt - #$  E*ternal ESG rating agencies try to meet his challenge by b!iling capacity thro!gh mergers/ ac3!isitions an partnerships. Recent evelopments inicate that the increasing eman from SRI professionals for transparent/ reliable an material ESG ran%ing information is li%ely to be accommoate by inherent mar%et ynamics flan%e by self4reg!lation. The latter &ill be essential to ass!re common 3!ality stanars in regars to the transparency an reliability of ran%ings. Stanarise ESG scores in combination &ith research an 3!ality stanars &o!l finally ma%e s!stainability ata s!fficiently comparable/ consistent/ an reliable for SRI ecision ma%ing/ &hich 4 !ltimately 4 might lea to a s!bstantial e*pansion of the ESG ratings mar%et &ell beyon its c!rrent level. )t longer4term/ ESG rating scores &ill only be accepte by the mar%et if the level of valiity antransparency of the !nerlying ata an applie rating methoology are ae3!ate to meet the stanars of fi!ciary !ty. )s long as they are not f!lly transparent/ comparable/ an base on material/ in!stry4specific/ an reliable ata/ ESG ratings &ill remain of limite relevance for SRI ecision4ma%ing/ as they cannot provie asset managers the reliable reso!rce they &o!l nee to meet investors eman for more active SRI management. - #  )nne*List of References?ailey/ Jonathan X lempner/ ?ryce an Yoffer/ Josh 0#,1/ S!staining s!stainability: ;hat instit!tional investors sho!l o ne*t on ESG/ Mcinsey/ &ebsite: http:KK&&&.mc%insey.comKin!striesKprivate4e3!ity4an4principal4investorsKo!r4insightsKs!staining4s!stainability4&hat4instit!tional4investors4sho!l4o4ne*t4on4esg ?lac%Roc% 0#,1/ ?lac%Roc% b!ils s!stainable pro!ct range &ith fi*e income ET( 0press release/ 11K,1K#,1/ https:KK&&&.blac%roc%.comKcorporateKen4gbKne&sroomKpress4releasesKarticleKcorporate4oneKpress4releasesKblac%roc%4b!ils4s!stainable4pro!ct4range4&ith4fi*e4income4etfZG? ?lo&fiel/ Michael an M!rray/ )lan 0#,11/ Corporate Responsibility 0secon eition/ 9*for 5niversity Hress?oiral/ 9livier 0#,1/ S!stainability Reports as Sim!lacra 4 ) Co!nter4)cco!nt of ) an )U GRI Reports/ )cco!nting/ )!iting X )cco!ntability Jo!rnal/ Ool. #/ 8o. =/ p. 1,=1/ http:KK&&&.emeralinsight.comKoiKpfpl!sK1,.11,'K)))J4,4#,1#4,,BB'?SR 0#,1#/ Trens in ESG Integration in Investments 4 S!mmary of the Latest * an Recommenations to )ttract Long4Term InvestorsCeres 0#,1+/ Mooys Incorporate ESG into Ratings/ http:KK&&&.ceres.orgKinvestor4net&or%Kresol!tionsKmooys4incorporate4esg4into4ratings C() Instit!te 0#,1+/ Environmental/ Social an Governance Iss!es in Investing  ) G!ie for Investment HrofessionalsC() Instit!te 0#,1+/ ESG Iss!es in Investing: Investors Deb!n% the Myths C?I 4 Climate ?ons Initiative 0#,1/ &ebsite: http:KK&&&.climatebons.netKDeloitte 0#,1/ Disclos!re of Long4Term ?!siness Oal!e/ Deloitte 5niversity HressDeloitte 0#,1/ S!stainability Disclos!re: Getting )hea of the C!rve Eccles/ Robert G. an Wo!mans/ Tim 0#,1+/ In this corner/ DJSI an in this corner/ materiality/ Materialitytrac%er &ebsite: http:KK&&&.materialitytrac%er.netK#,1+K,=Kin4this4corner46si4an4in4this4corner4materiality4ingK / accesse on 1K,K#,1Empirical Research Hartners 0#,1/ Stoc% Selection: Research an Res!lts 4 Investment Ieas from the Ivory To&er 0iss!e: May 1B/ #,1 / http:KK&&&.empirical4research.comK&p4contentK!ploasK#,1K,+KStoc%4Selection4Investment4Ieas4from4the4Ivory4To&er4May41B4#,1.pf - #+  E!ropean Commission 4 DG Environment 0E8O.(.1KET5K#,1K,,,#/ Reso!rce Efficiency an (i!ciary D!ties of Investors 4 (inal Report E!rosif 0#,1/ E!ropean SRI St!y(riee/ G!nnar K ?!sch/ Timo K ?assen/ )le*aner 0#,1+/ ESG an (inancial Herformance: )ggregate Evience from More Than #,,, Empirical St!ies/ Jo!rnal of S!stainable (inance X Investment/ Ool. +/ 8o. / http:KK&&&.tanfonline.comKoiKf!llK1,.1,',K#,$,=B+.#,1+.111'B1= GES an 9e%om Research 0#,1/ oe%om research an GES intensify partnership 0press release/ #,K#,1+/ http:KKoe%om4research.comKhomepageKgermanK1+1,#%om4GES4 partnershipZE8.pf GISR &ebsite/ http:KKrates!stainability.orgKh!bKine*.phpKsearchKreport4in4graph Green?i7 0#,1/ State of Green ?!siness #,1GRI 0#,1/ The E*ternal )ss!rance of S!stainability Reporting/ https:KK&&&.globalreporting.orgKreso!rcelibraryKGRI4)ss!rance.pf GRI 0#,1/ Defining ;hat Matters 4 Do companies an investors agree on &hat is material[GSI) 0#,1/ Global S!stainable Investment Revie& #,12ale/ Jon 0#,1/ The )ppeal of S!stainable Investing/ Morningstar Maga7ine 0iss!e: Jan!ary #,12elmann/ Michael 0#,11/ S!stainability: 9pport!nity or 9pport!nity Cost[ )pplying ESG (actors to a Hortfolio Does 8ot 8egatively Impact Herformance an May Enhance It/ RCM S!stainability ;hite Haper/ RCM 0)llian7 Gro!p2o&er/ Mi%e 0#,1+/ Co!l s!stainability s!rvey fatig!e la!nch a
billion in!stry[/ Green?i7 &ebsite/ https:KK&&&.greenbi7.comKarticleKgisr4program4c!ts4core4esg4research4an4ratings IIRC 0#,1/ Integrate Reporting -IR Creating Oal!e  Oal!e to the ?oarInvestopeia ;ebsite/ http:KK&&&.investopeia.comKtermsKeKenvironmental4social4an4governance4esg4criteria.asp]i*77$&8hb%5f# / accesse on 1K,K#,1Jac%ie Oanerbr!g 0#,1/ )ligning Wo!r Investments ;ith Wo!r Oal!es/ 5S Tr!st Capital )cc!men 0iss!e #=/ #,1/ http:KK&&&.!str!st.comKp!blishK!stKcapitalac!menKs!mmer#,1Kinsightsinvestments4val!es.html han/ Mo7affar K Serafeim/ George an Woon/ )aron 0#,1+/ Corporate S!stainability: (irst Evience on Materiality/ The )cco!nting Revie&/ 2arvar ?!siness School/ iss!e: March B/ #,1+/ http:KKhbs&%.hbs.e!KitemKcorporate4s!stainability4first4evience4on4materiality - #  Lemos Stein/ Maria 0#,1/ The ?attle to Grae ESG Investments 2eats 5p/ The ;all Street Jo!rnal/ 11K,#,1/ http:KKblogs.&s6.comKris%ancomplianceK#,1K,!p Lyenberg/ Steve 0#,1+/ Hortfolios an Systemic (rame&or% Integration: To&ars a Theory an Hractice 0E*pos!re raftMain/ 8ic% an 2espenheie/ Eric 0#,1#/ Integrate Reporting  The ?ig Hict!re/ Deloitte Revie&/ Iss!e 1,Montier/ James 0#,1/ The ;orls D!mbest Iea/ GM9 LLCMooie/ )lison 0#,1+/ Creit rating agencies are miscalc!lating ris%s of climate change/ report fins/ The G!arian/ #+K,K#,1+ online iss!e: http:KK&&&.theg!arian.comKs!stainable4 b!sinessK#,1+K6!nK#+Kcreit4rating4agencies4ris%s4climate4change4report4finance Mooys 0#,1+/ Mooys )pproach to )ssessing ESG Ris%s in Ratings an Research/ Sector In4Depth ;hite Haper/ Mooys Investors Service/ ,'K,BK#,1+Mooney/ )ttracta 0#,1/ Morningstar ethical rating co!l cost f!ns billions/ (inancial Times/ 1=K,1K#,1/ http:KK&&&.ft.comKintlKcmsKsK,Ke'acae4bb'$411e+4bf=e4'a$#1.html 8ovethic Research 0#,1/ 9vervie& of ESG Rating )genciesoe%om research )G 0#,1/ The Impact of SRI9RSE 4 9bservatoire s!r la Responsibilit^ Soci^tale es Entreprises 0#,1#/ G!ie to S!stainability )nalysis 9rganisations 05patesHet%ov/ Miroslav an ;il%ins/ Michael 0#,1+/ Climate change: testing the resilience of corporates> creit&orthiness to nat!ral catastrophes/ The Treas!rers ;i%i/ https:KK&i%i.treas!rers.orgK&i%iKClimateZchange:ZtestingZtheZresilienceZofZcorporatesE#',BBZcreit&orthinessZtoZnat!ralZcatastrophes / accesse on 1K,K#,1HRI 0#,1/ Report on Hrogress #,1 HRI 0#,1+/ Report on Hrogress #,1+ HRI 0#,1/ Creit ratings agencies embrace more systematic consieration of ESG 0press release/ #K,+K#,1/ https:KK&&&.!npri.orgKpress4releasesKcreit4ratings4agencies4embrace4more4 systematic4consieration4of4esg HRI 0#,1/ Statement for ESG in creit ratings/ https:KK&&&.!npri.orgKo&nloaZreportK1$=B H&C/ S!stainability Disclos!res: Is Wo!r Company Meeting Investor E*pectations/ In The Loop/ Iss!e: J!ly #,1+/ http:KK&&&.p&c.comK!sKenKcfoirectKp!blicationsKin4the4loopKs!stainability4isclos!re4g!iance4sasb.html Rogers/ Jean 0#,1/ + Mar%et Hroblems the SEC Can 2elp Solve Thro!gh Reg!lation S4/ http:KK&&&.h!ffingtonpost.comK6ean4rogersKfive4mar%et4problems4the4ZbZBB+B$$'.html - #=  Thirty-six million academics use this site every month. 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Help Center Academia © 2017 S)S? 0#,1/ Concept Release on ?!siness an (inancial Disclos!re Re3!ire by Reg!lation S4/ https:KK&&&.sec.govKcommentsKs=4,41Ks=,14#+.pf SXH Do& Jones Inices an RobecoS)M 0#,1/ SXH Do& Jones Inices an RobecoS)M the (irst to La!nch Inices 5sing ESG as a Smart ?eta (actor 0press release/ 1BK,K#,1/ http:KK&&&.s!stainability4inices.comKimagesK1,1B4press4release4sp4esg4inices4en4vef.pf Searcy/ Cory 0#,1/ Its all Relative  The (atal (la& in Corporate S!stainability Ratings/ S!stainable ?rans &ebsite: http:KK&&&.s!stainablebrans.comKne&sZanZvie&sKne&ZmetricsKcoryZsearcyKitsZallZrelativeZfatalZfla& ZcorporateZs!stainabilityZratings SICM 4 S!stainable Insight Capital Management 0#,1/ ;ho are the ESG Rating )gencies/ S!stainable Insights/ (ebr!ary #,1 iss!eSICM 4 S!stainable Insight Capital Management 0#,1/ ESG (!n ratings la!nche/ S!stainable4Trens/ 14#,1 iss!eSRI Services 0#,1/ )viser SRI ()s X Lin%s/ SRI Services &ebsite: http:KK&&&.sriservices.co.!%Kavising4on4sriKfa3s/ accesse on 1K,K#,1 S!stain)bility 0#,1,/ Rate the Raters Hhase 1 4 Loo% ?ac% an C!rrent StateS!stain)bility 0#,1,/ Rate the Raters Hhase $  5ncovering ?est HracticesS!stain)bility 0#,1/ Rate the Raters Hhase +  !estionnaire for Raters: CSR 2!b/ S!stainable Stoc% E*changes 0SSE Initiative 0#,1+/ Moel G!iance on Reporting ESG Information to Investors  ) Ool!ntary Tool for Stoc% E*changes to G!ie Iss!ers58 Global Compact/ )ccent!re S!stainability Services 0#,1,/ ) 8e& Era of S!stainability/ https:KK&&&.!nglobalcompact.orgKocsKne&sZeventsK'.1K58GCZ)ccent!reZCE9ZSt!yZ#,1,.pf 58 HRI 0#,1/ Hrinciples for Responsible Investment ?roch!re58EH (inance Initiative/ 58 HRI 0#,1+/ Report on Hrogress: (i*e Income5nite 8ations Global Compact 058GC/ 58 HRI/ et al. 0#,1+/ (i!ciary D!ty in the #1st Cent!ry 5nr!h/ Gregory K iron/ Davi K r!sch&it7/ 8ina K Reeves/ Martin K R!bel/ 2olger K Meyer 7!m(ele/ )le*aner 0#,1/ Investing for a S!stainable (!t!re/ MIT Sloan Management Revie&/ iss!e: May #,1/ http:KKsloanrevie&.mit.e!Kpro6ectsKinvesting4for4a4s!stainable4f!t!re 5S Sif (o!nation 0#,1/ Impact of S!stainable an Responsible Investment5S SI( ;ebsite/ http:KK&&&.!ssif.orgKmisperceptions / accesse on 1K,K#,1- #'  5S SI( ;ebsite/ http:KK&&&.!ssif.orgKsribasics / accesse on 1K,K#,1;einreb Gro!p 0#,1/ State of the Hrofession Report #,1 ;hite/ )llen L. 0#,1#/ Reefining Oal!e: The (!t!re of Corporate S!stainability Ratings/ Corporate Governance (or!m/ iss!e #B;hite/ )llen L. 0#,1+/ ;hy S!stainability Ratings Matter/ MIT Sloan Management Revie&/ ;ebsite accesse on 1K,K#,1/ http:KKsloanrevie&.mit.e!KarticleK&hy4s!stainability4ratings4matterK ;illar/ ?ob 0#,1/ $ reasons investors &ill care abo!t ESG in #,1+/ Green?i7 online article/ https:KK&&&.greenbi7.comKblogK#,1,K#+Kesg4investor4initiatives - #B  List of intervie&eesThe a!thor &o!l li%e to ac%no&lege the follo&ing persons for their val!able time an inp!t to this research paper: )llen ;hite/ (o!ner/ GISR/ 5.S.).)rchie ?eeching/ Manager (i*e Income/ 58 HRI/ 5..?ernhar Sch&ager/ 2ea of S!stainability 9ffice an Member of GISR Consorti!m/ Robert ?osch Gmb2/ GermanyCary rosins%y/ ESG )visor/ ?ro&n 5niversity/ 5.S.).Cecilia Repins%i/ Hrogram Manager/ Mistra (inancial Systems/ S&eenCory Searcy/ )ssociate Hrofessor/ 5niversity of Ryerson/ CanaaDieter 8ie&ierra/ Director Corporate Comm!nications/ oe%om Research/ GermanyDomini3!e ?lanc/ 2ea of Research/ 8ovethic/ (rance(iona Reynols/ Managing Director/ 58 HRI/ 5..2enry Shilling/ Senior Oice Hresient ESG/ Mooys Investors Service/ 5.S.).2er&ig Heeters/ Hresient/ (or!m ET2I?EL an )rista/ ?elgi!matarina 2ammar/ Senior ESG )nalyst/ 8orea/ S&eenristen S!llivan/ Hartner/ Deloitte )visory/ 5.S.).Lars Moratis/ (o!ner/ Impact)caemy/ The 8etherlansMeg Ooorhes/ Director of Research/ 5S SI(/ 5.S.).Hetter ?r!nnberg/ )nalyst/ 8orea/ S&eenStephen 2ine/ Dep!ty CE9/ OigeoEiris/ 5..