Rating the ratings providers

An article by HL last week entitled “FTSE 100 –  the 5 highest ESG rated companies”  https://lnkd.in/dFxuxXR is attracting considerable commentary owing to the identities and sectors of the top 5; in particular, discussion centred around how can a process that puts mining and tobacco in the top 5 be credible.

Leaving aside the identity of the companies, by focusing on a very small subset and one of the providers solely is, in our opinion, missing a significant part of the narrative, which is the sheer variability of the results from the ratings providers. At Earth Active, we’ve looked at the whole FTSE 100, not just the top 5, for three of the providers – Refinitiv, S&P Global and Sustainalytics as shown in our chart below. The sheer variability in the results is obvious, moreover a top five compilation from another provider would have a very different answer.  Furthermore, one needs to consider what factors different providers consider – from assessing (and then rating) an organisation’s ESG riskiness from a long term investment perspective, to ESG performance and onto ESG contribution to society and the planet.  Each assessment has a different weighting based on their perspective and we would suggest that some of the top performers in each of the indices have made certain to align their communications and transparency with the highest weighted factors to secure a favourable ranking.

A second point is that the ratings providers are generally clear that they consider relative performance, e.g. Refinitiv’s explanation that a fourth quartile score “indicates excellent relative ESG performance and high degree of transparency in reporting material ESG data publicly”.  There appears to be a misunderstanding that the purpose of the ratings is to provide an overall ranking, exemplified by the  subheading of the HL article – “a look at 5 of the most environmentally and socially responsible companies in the FTSE 100”.

Our view is that it is essential to take a precautionary approach to basing decisions on rating indices, which is the same as that espoused by the agencies themselves.

9 March 2021
Earth Active
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