Schroders portfolio manager and sustainability specialist, Katherine Davidson, said ratings were often backward-looking and reactive to controversies than predictive of controversies.
“They also often reward disclosure or greenwashing rather than an actual genuine commitment to sustainability,” she said.
“[Ratings] are opaque and quite inconsistent in the way they score companies.
“So, when you compare the scores from an MSCI, a Sustainalytics, and a Thomson Reuters you get very different results and it’s hard to know how the companies have come up with those numbers.”
She added that there are “companies that have a shiny ESG report when they are not really committed to corporate responsibility”.
Third party sustainability ratings can be used effectively if paired with unconventional metrics to help evaluate whether an investment idea is environmental, social, and governance (ESG) compliant, according to Schroders.
Other portfolio managers have also warned about the pitfalls of using third-party ESG data.
Maarten Bloemen, portfolio manager and research analyst for global equities at Franklin Templeton Investment, said previously that ESG data providers such as MSCI ESG and Sustainalytics can provide an outdated view: “Without any disrespect to them, they do use the best information but sometimes it’s a year in the past.”
He cited as an example Denmark-based power company Orsted. ESG reports show that they still have high carbon emissions. However, the firm has made recent efforts to transform its model to become a clean energy provider in Europe, Bloemen said.
Mitch Reznick, co-head of credit and head of credit research at Hermes Investment Management, told FSA earlier that ESG data from third-party vendors was static.
Companies with low ESG scores are labelled as poor ESG stewards, but the fact that management may be actively taking steps to improve the score is not taken into account.
Reznick, however, uses the backward-looking data in a way the provider did not intend – to find mispriced opportunities.
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