Investors' in-house ESG scores diverge more than providers' rating

ESG ratings agencies are more aligned on the sustainability performance of companies than investors, according to research.

Paris-based start-up Valuecometrics has found that there is just 30% correlation between the ESG scores that asset managers assign to their portfolio companies, compared with 50% for external ratings providers.

The findings are based on the internal scores of 30 asset managers. Valuecometrics anonymises the scores and standardises them so that they each represent a number from 1 to 100.

“Everyone talks about the low correlation among ratings agencies when it comes to ESG scores, but our data shows that the correlation among investors is actually even lower and more scattered,” explained Mariem Mhadhbi, the founder of Valuecometrics.

Regulating ESG scores

After years of criticism from investors and others – including concerns that the high divergence levels are indicative of the arbitrary nature of the assessments – regulators in the UK and Europe are beginning to clamp down on ESG ratings and their providers.

In December, the Economics and Monetary Affairs Committee of European Parliament announced that it had voted in favour of major changes to the EU’s plans to regulate ESG ratings providers.

Among the amendments, MEPs are pushing for a separation of the ESG pillars of ratings, and greater emphasis on double materiality. They also want smaller ratings houses to be given more opportunity to participate in the market, so they’re pushing for preferential treatment for firms with less than 15% of market share.

Drivers of divergence

Mhadhbi told IPE that the high levels of divergence among external ESG ratings was driven by three things.

“First, indicators can have the same name but measure different things. Second, some ratings cover Scope 1, 2 and 3 [emissions data] while others don’t. And third, the weight that each of these indicators receives in the overall score can vary.”

Divergence among investors is higher partly because they have different thematic priorities, which will impact the third factor more dramatically. Mhadhbi said the research highlights the lack of consensus around how sustainability and ESG issues are priced into markets.

“Today, companies publish reports, and agencies rate them. Then investors apply elements of those reports and ratings to their own scores, but they aren’t pricing sustainability consistently when they do that. It’s investor perception that drives the flow of money, regardless of whether it’s real or not. So it matters what that perception is.”

The research also found that investors generally rate companies less highly on ESG issues than external ratings providers.