Service providers defend ESG data as asset owners' criticism grows
In recent months, several asset owners have told AsianInvestor that ESG-related information offered by third-party data providers and ratings agencies is not comprehensive or always accurate.
Others have questioned scoring models that result in polluting companies being designated adequate or strong performers in ESG indices, as well as pointed out the large variation in scores from different providers.
ESG data providers and ratings agencies have defended the metrics they provide.
An MSCI spokesperson responded that different investors had different requirements.
“At this still-early stage in the development of ways to measure ESG risks, opportunities, contributions and negative impacts, many investors value having a diversity of views and approaches to inform their own perspectives and appreciate the need for ongoing development and innovation. This is especially true in areas where regulation is not prescriptive,” the spokesperson said.
DIFFERENT OUTPUTS
In November, 2022, at AsianInvestor’s 12th Southeast Asia Institutional Investment Forum in Singapore, two senior executives from the Khazanah Nasional Berhad and OMERS Asia said that ESG ratings need common standards, as different data provided by various agencies are raising challenges in measuring the performance of investor portfolios from an ESG perspective, especially on the "social" and "governance" components.
“We use a lot of third-party providers [in the measurement of S and G], and one of the challenges we find is that when you look at X versus Y, the outputs are very different,” said Anand Ramachandran, Singapore-based managing director with Ontario Municipal Employees Retirement System (OMERS) Asia.
READ MORE: Khazanah, OMERS Asia call for ESG rating improvements
In response, rating agencies emphasised the importance of showing clear evidence for how ESG is measured.
"Investors need to have transparency on how measures are built and the information that goes into them. We are always keen that users of the ratings and the companies that we rate understand what we are looking at,” said Helena Fung, head of sustainable finance & investment, APAC at the London Stock Exchange Group, which owns FTSE Russell.
She pointed to the company’s emphasis on alignment of global reporting frameworks such as: Global Reporting Initiative, Task Force on Climate-Related Financial Disclosures (TCFD), and the Sustainability Accounting Standards Board.
In terms of scoring, a rating was not necessarily desirable, she added. “In listed equity and fixed income, there are different approaches when it comes to scores because they are predicated on different views of what is material,” she said.
“MSCI offers high-quality independent ESG ratings and metrics, all constructed using publicly available methodologies, developed and enhanced in consultation with market participants,” said the MSCI spokesperson.
TRANSPARENCY NEEDED
But Sarita Gosrani, ESG director at bfinance, said rating agencies should improve on their transparency.
“Methodologies used by data providers aren’t transparent: you can’t see why a certain rating was produced,” she said.
“ESG and carbon emissions data tends to be inherently backward-looking, and there is also a significant lag in terms of the reporting time.”
One of several asset owners to point to gaps in ESG information provided by major providers was Huh Jang, chief investment officer at South Korea’s Public Officials Benefit Association (POBA).
POBA gathers information on ESG implementation from third-party consulting firms such as Mercer and Preqin; in April, Jang told AsianInvestor he still wants better and more standardised data on how, and how much, the pension fund can gain from a greater emphasis on ESG.
“[Third parties] provide outside expertise on ESG-related information, but I still question the comprehensiveness and accuracy of available ESG-related data in general,” Huh said.
READ MORE: POBA CIO questions correlation between ESG and returns
In response, rating agencies emphasised the need for investors to include a range of data sources.
“To construct “sustainable” portfolios in line with the concepts laid out by, for example, MiFID II or SFDR Article 9, institutions would need to consider multiple kinds of metrics together,” said the MSCI spokesperson.
“MSCI ESG Research always welcomes feedback from market participants, and we work closely with our global clients to enhance our data and methodologies through ongoing dialogue and formal consultations, to make regular updates to suit client demand and integrate developing datasets and technology.”
Gosrani stressed the need for asset owners and their managers to make sense of the information provided and to draw from a range of sources. “We do not believe that passively using an ESG provider’s information — with no other inputs — produces ‘sustainable’ portfolios. But this does not mean that the data is inadequate,” she said.
“We typically do not want to see managers relying heavily on a single source of external data for their ESG assessments, but we are keen to see teams making intelligent use of third-party data,” she added.
Mercer declined to comment for this story, citing conflict of interest, and S&P did not respond with comment.