Exploring Expert and Investor Views on ESG Ratings June 2019 - - PowerPoint PPT Presentation

Exploring Expert and Investor Views on ESG Ratings

June 2019

Introductions

Christina Wong Director Michael Harvey Senior Manager

In May of 2010 we launched a multi-phase research program entitled Rate the Raters (RtR) aiming to shed light on the universe of corporate sustainability rankings. We are now re-engaging this topic through a series of surveys and interviews.

Rate the Raters 2010 - 2018

AVAILABLE NOW: sustainability.com

Rate the Raters 2019: Expert Survey Results

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Overview of Survey Respondents

Online questionnaire completed in the fall of 2018 by 319 experienced sustainability professionals.

Experience

Respondents have the following experience working on sustainability issues:

Geography

Experts surveyed span 60 countries in the following regions:

29% 8% 66% 12%

Asia

4%

Oceania

39%

Europe

35%

North America

6%

Latin America

3%

Africa

More than 10 years 5 to 10 years 3 to 4 years

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Sectors

Respondents were drawn from the following sectors:

Familiarity

Seventy-nine percent of respondents noted they were familiar with ESG ratings, with familiarity varying by sector:

51%

Corporate

22%

Service & Media

11%

Academic & Research

8%

NGO

3%

Government

4%

Other

Total Corporate Other Service & media NGO Academic/Research/Th ink Tank Government 79 93 75 70 59 57 45

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What Makes a Good Rating

Data sources, methodology and materiality shape perceptions of rating

Respondents agree on credibility of data sources being the most important factor in determining the quality of a rating.

65 66 80 80 90 92 95 8 8 3 2 1 2 1

Corporate/stakeholder involvement in evaluation process Common usage by investors and/or other stakeholders Disclosure of methodology Experience/competence of research team Focus on relevant/material issues Quality of methodology Credibility of data sources

Important (4+5) Not Important (1+2)

8

2018: Factors determining rating quality, bars indicate % of respondents who selected each score

Question

Please rate the importance of each of the following factors when determining the quality (i.e., excellence, robustness and accuracy of evaluation) of an ESG rating. Please use a 5-point scale where 1 is not important at all and 5 is very important. (Total number of responses to question (n) =319

Unprompted answers: In addition to being asked to evaluate the above list of prompted quality factors, experts were given the

• ption to add any “other” factors

they believed contributed to quality. The most commonly mentioned

• ther factors were:
• Consistency
• External validation
• Independence of the raters

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Ratings Quality

Unprompted, RobecoSAM, MSCI, CDP and Sustainalytics are mentioned most often as highest quality ratings

RobecoSAM was by far the most frequently mentioned ESG rating by sustainability experts.

2018: ESG ratings quality: Bars represent number of respondents who listed each rating

Question

Which ESG ratings do you consider to be of highest quality (i.e. excellence, robustness and accuracy of evaluation). Please consider both broad, combined ESG ratings and those specific to individual industries or ESG issues. Please enter a maximum of 3 ESG ratings in the spaces provided. (n=319)

9 13 16 26 29 29 77 85 86 130

EcoVadis CSR Rating ISS (not specified)/ISS Ethix Vigeo Eiris Sustainability Rating Bloomberg ESG Performance Scores FTSE Russell’s ESG Ratings ISS-Oekom Corporate Rating Sustainalytics’ ESG Risk Ratings CDP Climate, Water & Forests Scores MSCI ESG Ratings RobecoSAM Corporate Sustainability Assessment

CDP and RobecoSAM are judged most favourably in forced quality rating

2018: ESG ratings quality, bars indicate percentage of respondents selecting each quality score

Question

Please rate the following ESG ratings based on: a) Quality (i.e., excellence, robustness, and accuracy of evaluation). Please use a 5-point scale, where 1 is very low quality and 5 is very high quality.

CDP and RobecoSAM received the most high scores from respondents that were asked to evaluate the quality of 11 specific ESG ratings.

27 29 32 38 41 42 42 51 54 66 67 14 11 15 8 12 11 12 10 7 8 5 19 25 15 25 16 18 14 11 15 8 9

Vigeo Eiris Sustainability Rating (n=160) Thompson Reuters ESG Scores (n=113) EcoVadis CSR Rating (n=164) ISS QualityScore (n=120) FTSE Russell's ESG Ratings (n=185) ISS-Oekom Corporate Rating (n=149) Bloomberg ESG Performance Scores (n=191) MSCI ESG Ratings (n=210) Sustainalytics' ESG Risk Ratings (n=224) RobecoSAM Corporate Sustainability Assessment (n=245) CDP Climate, Water & Forests Scores (n=244)

High quality (4+5) Low quality (1+2) DK/NA

Expert perceptions of ratings are similar across Europe and North America

Respondents in Europe and North America hold similar views on quality except for the ISS Quality Score.

2018: European and North American perspectives on ESG ratings quality, bars indicate % of respondents who selected a rating as high quality (4+5)

Question

Please rate the following ESG ratings based on: a) Quality (i.e., excellence, robustness, and accuracy of evaluation). Please use a 5-point scale, where 1 is very low quality and 5 is very high quality.

21 26 28 31 33 40 42 51 55 67 67 53 33 26 38 46 46 40 54 61 63 74

ISS QualityScore Thompson Reuters ESG Scores (replacement of ASSET4) Vigeo Eiris Sustainability Rating EcoVadis CSR Rating FTSE Russell's ESG Ratings Bloomberg ESG Performance Scores ISS-Oekom Corporate Rating MSCI ESG Ratings Sustainalytics' ESG Risk Ratings RobecoSAM Corporate Sustainability Assessment CDP Climate, Water & Forests Scores

North America Europe

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Rating Usefulness

RobecoSAM and CDP judged most favourably in forced usefulness rating

Perceptions of usefulness map closely to perceptions of quality with RobecoSAM, CDP, Sustainalytics and MSCI again at the top.

2018: ESG ratings usefulness, bars indicate % of respondents selecting each usefulness score

Question

Please rate the following ESG ratings based on: b) Usefulness (i.e., how useful they are). Please use a 5-point scale where 1 is not useful at all and 5 is very useful.

19 22 28 29 33 34 37 48 49 52 53 25 16 15 20 16 16 15 14 8 14 16 21 28 30 17 17 19 17 14 15 12 11

Vigeo Eiris Sustainability Rating (n=160) Thompson Reuters ESG Scores (n=113) ISS Usefulness Score (n=120) EcoVadis CSR Rating (n=164) FTSE Russell's ESG Ratings (n=185) ISS-Oekom Corporate Rating (n=149) Bloomberg ESG Performance Scores (n=191) MSCI ESG Ratings (n=210) Sustainalytics' ESG Risk Ratings (n=224) CDP Climate, Water & Forests Scores (n=244) RobecoSAM Corporate Sustainability Assessment…

Useful (4+5) Not useful (1+2) DK/NA

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How ESG Ratings Are Used

Corporates use ESG ratings to inform decision-making

Seventy-two percent of corporate respondents say ESG ratings are useful for informing decision-making.

2018: Organizations’ use of ESG Ratings to inform decision-making by sector, bars represent % of respondents

Question

Has your organization used any ESG ratings to inform decision-making? (n=319)

20 27 30 42 44 72 54 74 73 70 58 56 27 45

Academic/Research/Think Tank Government NGO Other Service/Media Corporate Total

Yes No

In their own words: How sustainability experts use ESG ratings

Question

Which ESG ratings has your organization used to inform decision-making and in what way? (n=150)

Data collection and disclosure

“All ESG ratings inform what data we collect and compile so we can be

• responsive. Impact on business

decisions is minimal.” “High quality ratings are used to assess performance and disclosure as well as design and prioritize improvement plans.”

Gap analysis and trends Stakeholder engagement

“We use our own ESG ratings to help steer our stakeholder engagement, priority actions and disclosures. “…used as an engagement tool with internal stakeholders, which may lead to change in practices.”

Internal assessment and strategy development

“DJSI has been used as an internal assessment tool since it is so

• comprehensive. The CDP has served

the same purpose.” “DJSI, Sustainalytics, MSCI, CDP – for identifying areas of strength and opportunities.”

“DJSI and Sustainalytics helps us to understand what areas need more attention from our teams.” “We use DJSI, MSCI and CDP to benchmark against industry and identify gaps so that we can 1) improve on responses to questions in the areas, and 2) to improve business practices.”

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Initial Investor Perspectives

How do investors use ratings?

They often use more than

• ne

“We provide all of our asset portfolio managers access to some ESG rating.” “We have access and use virtually all of the main ones for different reasons.”

ESG ratings are only a starting point

“We do subscribe to research ratings, but they don’t prescribe if we buy or sell, they are just other points of information.” “We still go through all the ratings information and weight them - we don’t use their score per se, it’s highly important to us to build our

• wn opinion and also reach
• ut to companies as well.”

MSCI and Sustainalytics are mentioned most often, but are not without issues

“MSCI helps identify the average performance in a sector and the leaders and

• laggards. It’s the peer

benchmarking.” “The raters like MSCI and Sustainalytics will never know the companies as well as the

• company. That is why we rely
• n our own engagement with

companies as well.”

DJSI is not used to inform decision making

“No, I don’t care if a company is included or excluded in the DJSI index… I hate to say it because I was there, but people don’t care because its not transparent. No one knows what’s behind it. It’s a beauty contest, like an award. It’s not useless, nice signal of strong sustainability.”

Investor perspectives on the limitations of ratings

They overpromise what they can’t deliver

“They are like the best mediocre house in a bad neighborhood...they are not great quality. ESG ratings

• versell massively what they

can do, and are not transparent about the problems.” “There are false expectations around what these ratings can/should do”

Investors don’t always agree with the ratings

“Often our analyst may disagree with a rating because

• ur analyst knows the

company better. We have had instances where we put our analyst and the Sustainalytics analyst on the phone together. We often find that with MSCI and Sustainalytics, 9 times out

• f 10 our analyst will just

have more information than the rating provider and will direct them to a report or data point they may have missed.”

Backwards looking, and sometimes old data

“They are a rear-view mirror” “We also look at how up to date a ratings report is - we’ve seen some where the rating report wasn’t updated for 3 years and company put out a new report that was missed.”

Inconsistent Data

“Core challenge is that the information isn’t consistently reported - you can’ download the D&I data for MSCI world from Bloomberg - so you can’t use a consistent metric the way financial analysts are used to. The raters try to solve this issue by mashing it together into a number for every company, but if you look under the hood some of them are just blanks.”

What do investors look for in a good ESG rating?

Coverage

Investors are looking for ratings that offer coverage across sectors and companies, those with more coverage are likely to be more utilized by investors. “Not many are useful for large asset managers, I need universal coverage”

Ease of use/integration with standard systems and platforms

Investors want ESG ratings to be able to seamlessly integrate with the existing tools analysts use to evaluate companies - such as the Bloomberg terminal. “If you have to log into a different place, its less likely for our analysts to use them”

Experience of the research team

Like companies, investors want to have the analysts doing the ESG rating work to have strong experience and sector expertise. “15-20 years of experience appreciated… it’s not often the case.”

Transparency and materiality

Ratings need to transparently weight their assessments towards to those issues which have greatest potential to impact performance in the sector, over a given time- horizon.. “The problem with a lot of ESG ratings is they’re not done with understanding how the company creates value.”

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The Future of ESG Ratings

In their own words: Sustainability expert recommendations for ratings improvements

Question

Which of the following changes and solutions would you like to see in the next five years for ESG ratings to better serve companies, investors, and other stakeholders? – Other specify (n=40)

Make it easier for companies

“Make the process less time consuming from companies .” “More efficient engagement of rated companies in the process. Too much input required currently to several ratings well. MSCI asked for input and then ignored it; a waste

• f our time and a blemish on their

credibility.”

Tie ratings to sustainability thresholds and systemic changes

“I would like to see a threshold for contributing/undermining the future we want (e.g. future fitness and/or emitting vs. drawing down more CO2).” “Focus on and transparency about systemic conditions of the underlying transformation that is required for sustainability….”

Industry-specific materiality and normalization within industries

“Greater industry normalization; currently raters seem to be comparing apples to oranges within industries.” “Better understanding by ratings agencies of companies’ industry and the relevant factors.”

More qualitative analysis and preparation by analysts

“A move from quantitative to qualitative evaluations. An expert valuation of a company’s sustainability impact is far more useful than trying to measure and compare.” “Greater preparation and seniority of analysts performing the assessments… as well as more time dedicated to each assessment.”

In their own words: Sustainability expert recommendations for ratings improvements

Question

Which of the following changes and solutions would you like to see in the next five years for ESG ratings to better serve companies, investors, and other stakeholders? – Other specify (n=40)

Move away from ratings

“I would actually like to see these ratings become irrelevant and replaced by higher engagement between companies and investors - the ratings are never going to accurately capture sustainability performance.”

Greater transparency of methodology and assured independence

“Published, complete, full accounting of information requested and scoring criteria. Don’t make us guess what you want for each question. Don’t make us wonder what you expected after we get our scores (if we even get a breakdown of the top ranking/score).” “Elimination of paid support services, which in my opinion compromise the integrity of the ratings.”

In their own words: Investor recommendations for ratings improvements

Question

What changes and solutions would you like to see in the next five years for ESG ratings to better serve companies, investors and other stakeholders?

Focus needs to be on clean, high quality, regularly updated, high coverage data

“They shouldn’t do a ratings

• standard. We don’t want a single

rating in 20 years, we want data.” “I would love to see more frequent ratings (cycle and updates).”

Move towards self reporting for certain sectors

“I would expect - particularly in case of some sectors – to see a move towards self reporting under an industry umbrella.” “We would like to see greater engagement of rated companies in the evaluation process. I see a lot

• f this in the small-cap space.”

“If I was a company I’d be thinking about the low hanging fruit of scores that have picked up the most traction and then very quickly focus

• n what is core to my business.”

Focus on materiality and greater engagement

“It would be helpful if mainstream credit agencies included ESG considerations alongside their reports, not integrated/hidden away.”

Connect to credit ratings and financial systems

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