What is the point of ESG ratings?

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