It’s time to change how ESG is measured

illuminem summarizes for you the essential news of the day. Read the full piece on Harvard Business Review or enjoy below:

🗞️ Driving the news: The rapid rise of ESG investing, projected to surpass $50 trillion by 2025, is facing significant challenges due to structural biases in ESG ratings
• Researchers have identified a "measurement trap" where these ratings are skewed by easily measurable yet incomplete metrics, leading to misleading assessments of companies' true ESG impact

🔭 The context: ESG ratings often focus on Scope 1 emissions, ignoring emissions from supply chains, and unfairly penalize highly regulated industries with more customer complaints
• Furthermore, simplification into a single score and exclusion of impactful activities like green innovations from oil and energy firms distorts the true ESG performance of companies

🌍 Why it matters for the planet: Accurate ESG measurements are crucial for directing investments towards genuinely sustainable and responsible companies
• Flawed ratings can misallocate funds, failing to address significant environmental and social issues effectively

⏭️ What's next: The proposed solution involves unbundling the E, S, and G components to allow targeted investments and enabling companies to declare specific ESG goals
• This would enhance transparency, efficiency, and alignment between corporate actions and investor priorities

💬 One quote: "ESG ratings — and thus the investments associated with these ratings — are suffering from a 'measurement trap' that occurs when a metric used as part of the ESG rating is systematically biased toward certain industries or certain types of companies," said Lauren Cohen, Umit G. Gurun, and Quoc Nguyen

📈 One stat: By December 2020, ESG-linked assets had surged to constitute one-third of the $51 trillion U.S. assets under professional management

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