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Confused About ESG Ratings? Don't Be

Let Active Money Managers Cut Through the Noise

Remember when portfolio managers picked stocks based solely on a company’s investment fundamentals? Mundane things like valuation, earnings, growth prospects, profit margins? Some managers still do. But it’s hard to imagine there’s a manager anywhere today who isn’t at least aware of a company’s “values” component. That couldn’t have been said five or six years ago. The investment industry, if nothing else, has succeeded in achieving broad awareness of ESG factors. And folks in and around the markets appear to be increasingly baffled by its impact.


We make that observation with complete confidence because a team of experts at MIT recently released findings from its “Aggregate Confusion Project,” the group’s self-described deep dive into ESG ratings. Against a backdrop of ongoing political fuss and unspectacular returns, the MIT group, each member with respectable knowledge of the sustainable investing space, set out to analyze one of the biggest concerns related to ESG investing: inconsistency across ESG ratings. Specifically, the team wanted to “identify and document the inconsistencies among ratings organizations, with an objective of improving the quality of ESG measurements.”

It seems that all informed money managers in the sustainable space are aware that ratings are inconsistent across the various ESG rating agencies -- and there are several for us to consider. Among the more recognizable names are MSCI ESG Research RatingS&P Global ESG Rank, and Bloomberg ESG Disclosure Score. Less well known, perhaps, but every bit as important in the space, are Sustainalytics Industry RankCarbon Disclosure Project (CDP) Score, and Institutional Shareholder Services (ISS) Governance Score.

As it happens, there is very little correlation across these six reputable agencies’ sustainability-related ratings, as low as 0.48 in fact, meaning that the ratings of companies were consistent less than half the time. (By comparison, credit rating agencies typically have almost perfect correlations.) Frankly, we don’t believe anyone should be confused or unsettled about this disarray. Why? Because there is simply no way any ESG rating agency can view the world through the same lens.


Evaluating thousands of massively complex companies on their ESG policies, with a goal of boiling down as many as 700 criteria to a single metric, is an impossibly challenging task. Considerations include a company’s business model, executive leadership, financial strength, and "incident" history, all both short term and long term. To mine this data, the agencies send out questionnaires -- the primary source of data for ratings – that run 300 to 400 pages. And each ESG rating agency is free to adopt its own definitions of ESG performance and take its own approach to measuring that performance.

Correlated ratings from a half dozen or so independent rating agencies? Probably not going to happen. Ever. And that’s fine by us.


Less thoughtful observers have suggested ESG ratings are so inconsistent they should be disregarded altogether. Some make the easy suggestion that the ratings and/or the rating agencies be standardized, whatever that means. To its credit, the MIT team suggests both notions are a mistake. The group came to recognize that there will always be some divergence resulting from different rating methodologies, and the best way forward is the ongoing competition between the agencies to provide good product.

We appreciate ESG ratings for what they are: an important source of information when researching a company. We’re not looking for any kind of investment signal from an ESG score. We expect no predictive measure of financial returns, good or bad, from the data. But we’re confident that, with a little work, ESG ratings will provide us something worth knowing about a business’s corporate behavior.

If we can almost all agree that ESG plays an important role in an enterprise’s long-term financial resilience and performance, then maybe we can agree that ESG ratings usefulness lies in mining the insights about a company’s financial resiliency and long-term value it contains.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Shelton Capital Management

Shelton Capital Management is a multi-strategy asset manager offering investment solutions including mutual funds and separate accounts to the clients of wealth managers, the retirement plan market, and individual investors. Founded in 1985, Shelton Capital Management has maintained consistent investment principles and a steadfast focus on authentic customer service. Shelton Capital Management manages over over $3.1 billion in client assets as of 12/31/2022. For additional information, please visit or call (800) 955-9938.

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