Scientific Beta

Traditional scores/ratings for a company’s ESG credentials attempt to translate assessments across a host of criteria into one convenient number representative of overall corporate performance. In a white paper published in December 2020, Scientific Beta highlighted several problems linked to the use of such scores for investment decision making and portfolio construction. While these critical views are largely shared among academics, we wished to obtain feedback from financial market participants to see the extent of agreement among potential users of ESG scores, but also the qualitative arguments of those who hold differing opinions. This survey was conducted in the first quarter of 2021 among the readers of the Scientific Beta white paper.

Traditional scores/ratings for a company’s Environmental, Social and Governance (ESG) credentials attempt to translate assessments across a host of criteria into one convenient number representative of overall corporate performance. They have been advertised to investors as relevant metrics that support comparisons across companies as well as computation of aggregate portfolio performances.

However, in a paper published in December 2020, Scoring Against ESG? Avoiding the Pitfalls of ESG Scores in Portfolio Construction, (Christiansen and Ducoulombier). Scientific Beta highlighted several problems linked to the use of such scores for investment decision making and portfolio construction. These points of criticism are shared by organisations as diverse as the OECD and the WWF and are grounded in several academic papers documenting the lack of reliability of this type of ESG data. In particular, the divergence of ESG scores between different providers has implications beyond the world of finance. As evidenced both from a theoretical and empirical standpoint by an EDHEC Scientific Beta Research Chair Publication, Sustainable Investing with ESG Rating Uncertainty (Avramov et al., 2020), the lack of convergence of ESG scores is a source of uncertainty that ultimately makes financial markets inefficient at playing their most important role, i.e. allocating capital towards those companies best able to employ it in a manner that maximises welfare, whether this welfare is measured purely in monetary terms, or as in this case, in terms of beneficial ESG outcomes.

While these critical views are largely shared among academics, we wished to obtain feedback from financial market participants to see the extent of agreement among potential users of ESG scores, but also the qualitative arguments of those who hold differing opinions. This survey was conducted in the first quarter of 2021 among the readers of the Scientific Beta white paper.