Harvard Law Blog Post Details Concerns Surrounding ESG Data

In a recent blog post from the Harvard Law School’s Forum on Corporate Governance titled, “ESG Ratings: A Compass without Direction” the authors note that ESG ratings providers, while intended to extract insights into various elements of environmental, social, and governance performance and risk, have “come under scrutiny over concerns of the reliability of their assessments.” In recent years, the demand for ESG data has exploded, including demand from investors, companies, and regulators. This demand, the authors state, “has in many ways outstripped the ability of suppliers to supply the depth, detail, and accuracy of data required.” Even among similarly situated parties, what ESG ratings are supposed to measure can vary; and thus, the ratings industry is “highly fragmented” and not uniform in how they analyze and present ESG data. Additionally, the data sources used to populate ratings models include public, quasi-public, and private data – which in some cases can bring inherent problems with the completeness, standardization, and consistency of data. The paper finds that “while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments.”

Click here to read the complete paper “ESG Ratings: A Compass Without Direction.”