Knowledge Base
Evaluate ESG rating agency methodologies and compare different extra-financial rating approaches
Which methodological approach compares companies within their industry sector, allowing companies like ExxonMobil to receive high ESG scores?
The best-in-class approach, used by MSCI, S&P Global, and ISS-ESG, compares companies within their sector. This means a company can receive a good score if it outperforms its peers within its sector, even if its environmental or social impact is high compared to other sectors. For example, ExxonMobil can appear in certain ESG indices under this approach because it outperforms its competitors in the energy sector.
Which ESG rating agency uses a 0-to-100 scale to measure 'unmanaged ESG risk' in absolute terms, enabling cross-sector comparisons?
Sustainalytics adopted the best-in-universe approach in 2019, which measures unmanaged ESG risk on a 0-to-100 scale. This scale is divided into categories ranging from 'negligible' to 'severe,' allowing companies to be compared across different sectors, unlike the best-in-class approach, which is limited to intra-sector comparisons.
What rating did MSCI assign to Tesla for social governance in 2022?
In May 2022, Tesla was excluded from the S&P 500 ESG Index due to its lack of an internal carbon strategy, allegations of racial discrimination, and poor working conditions. Although MSCI and Sustainalytics maintained Tesla in their indices with different ratings, MSCI assigned an 'A' rating for social governance. This reflects the tension between potential environmental performance and problematic social governance.
What percentage of ESG rating divergences is attributed to differences in the indicators used, according to the 'Aggregate Confusion' study?
According to the 'Aggregate Confusion' study published at MIT Sloan in 2022, 56% of ESG rating divergences are attributed to differences in the indicators used by agencies. Other sources of divergence include the scope of analysis (38%) and weightings (6%). These differences explain why the average correlation between ratings is only 0.54.
The average correlation between ESG ratings from six major agencies is above 0.7.
According to the 'Aggregate Confusion' study published at MIT Sloan in 2022, the average correlation between ESG ratings from six major agencies is 0.54, with a range from 0.38 to 0.71. This correlation is far lower than that of credit ratings, which reaches 0.99 for Moody's and S&P. This indicates significant divergences among ESG rating agencies.
Categorize items by dragging them to the appropriate zones
Items to categorize:
Declarative data
Alternative data
ESG agencies use two main types of data sources: declarative data (sustainability reports, regulatory filings) and alternative data (NGOs, media, satellite tracking). For example, S&P Global uses 50% publicly verified data and 30% media and NGO analysis. These differences in data sources contribute to rating divergences.
Share of the ESG agency market controlled outside the EU
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Over 80% of major ESG rating agency players are now headquartered outside the European Union, primarily in the United States. This concentration raises concerns about data sovereignty and methodological independence. For example, Sustainalytics was acquired by Morningstar in 2020, Vigeo-Eiris by Moody's in 2019, and so on.
European Regulation 2024/3005 requires mandatory authorization from ESMA to operate in the European Union starting July 2, 2026.
European Regulation 2024/3005, adopted in November 2024, does indeed require mandatory ESMA authorization for ESG rating agencies to operate in the European Union starting July 2, 2026. The regulation also aims to strengthen methodological transparency and the management of conflicts of interest. This addresses concerns raised by the AMF and ESMA regarding the lack of transparency and the risks of conflicts of interest.