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What is the point of ESG ratings?

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By illuminem briefings 🌎

· 2 min read

illuminem summarizes for you the essential news of the day. Read the full piece on Financial Times or enjoy below:

🗞️ Driving the news: Environmental, social, and governance (ESG) ratings are criticized for being unreliable and poorly correlating to stock performance
Norway's sovereign fund Norges highlights the problematic nature of these imperfect sustainability indicators, which impact all market players

🔭 The context: Big investors often use their own valuation frameworks, selectively using data from ESG ratings provided by firms like MSCI, S&P Global, and Morningstar’s Sustainalytics
Despite mixed approaches to ESG data, funds managing $121tn have pledged to incorporate ESG issues, indicating significant market influence

🌍 Why it matters for the planet: The unreliability of ESG ratings hinders accurate assessment of sustainability risks and impacts
As ESG considerations become more central in investment decisions, the need for accurate, transparent sustainability metrics grows, impacting global environmental and social governance efforts

⏭️ What's next: There's a trend towards redefining ESG ratings, with regions like the EU setting specific standards for "green" investments
The focus is shifting towards providing reliable raw data for investors to better assess companies' sustainability profiles

💬 One quote: "Determining sustainability risks is, therefore, more akin to scrutinising tea leaves."

📈 One stat: ESG rating correlation is estimated at 60%, significantly lower than the up to 99% correlation seen in credit ratings

Click for more news covering the latest on ESG

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