ESG corporate ratings are redrawing the financial landscape, yet investors often struggle to interpret them.

Caroline Reyl, Senior Investment Manager, Stephen Freedman, Head of research and sustainability -Thematic Equities & Faisel Syed, ESG Specialist Pictet Asset Management.

Overview

Britain’s system of imperial measurements has long bamboozled and frustrated foreign visitors. The British themselves aren’t averse to complaining about it either. In a lecture to American students in 1884, the eminent Scottish mathematician Lord Kelvin described the UK’s ounces, yards and gallons as a “wickedly brain-destroying system of bondage under which we suffer.”1

Similar criticisms have been levelled at corporate ESG ratings. Not unlike the imperial system, the scoring frameworks that assess how far companies take environmental, social and governance considerations into account often sow confusion. Quantification doesn’t always provide clarification.

There are more serious grievances, too. Advocacy groups claim ESG scores reveal little about a company’s broader impact on society or the environment. The ratings are, they say, invariably specious and inconsequential.

The charge sheet, then, is a substantial one. But not all of it is reasonable.

This study takes a closer look at both the benefits and limitations of ESG corporate ratings and analyses the differences in philosophy and methodology across ratings providers. It then offers guidance on how ESG ratings are best used.