The news: Environmental, social, and governance (ESG) ratings lack consistency and are updated too slowly to be useful for fund managers, according to a Goldman Sachs division.
Lack of ESG clarity: The ESG ratings industry has grown exponentially in recent years as fund managers utilize third-party data for sustainable investment research. But ratings are marred by “huge subjectivity that goes into how you can determine the quality of ESG practice,” Goldman Sachs Asset Management’s Luke Barrs told Bloomberg.
In the absence of globally agreed-upon standards for ESG definitions, different providers use differing methodologies to assess companies’ scores, generating contrasting results. And the patchiness of ESG data means that the largest investment managers are forced to use two to five providers each, per EY research.
Flaws in the ratings mean wealth and asset managers need to also carry out their own research to mitigate the inconsistency risk from third party sources.