More standardisation required for ESG scoring in asset management – comparative study

A comparative study by a Maltese researcher has highlighted the need for standardisation of rules and regulations on ESG information.

Christian Buhagiar, who recently completed his Master’s dissertation at the London School of Business and Finance, said that ESG information is increasingly valuable for corporations, the public, governmental bodies and NGOs. Such standardisation, he concluded, would result in “better and comparable outputs from research providers for the benefit of asset managers in generating the desired out-performance”.

His study explained that financial markets can help to direct private capital to more sustainable investments but that, as demand grows, ESG rating and scoring mechanisms have become crucial. However, unlike credit rating agencies criteria for bonds, there is still no established industry accord on ESG rating methods being used.

Among other things, Mr Buhagiar’s study sought to understand what ESG scoring signifies in asset management; to understand and compare the different ESG rating methodologies by different agencies; and to understand which rating agency provided over-performance from a risk/return basis.

Although ESG ratings are meant to measure a company’s resistance to financially material environmental, societal and governance risks, the ESG output score can still differ significantly from one rating house to another, he found.

The study also proved an important assumption: that good quality companies will ultimately provide better share price performance as risks associated with ESG are diminished. The study showed that different portfolios within the U.S. equity space that track high ESG criteria from different rating providers managed to out-perform with better risk-adjusted returns when compared with the broader US Equity market (S&P 500 index).

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