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 Market Mysteries of the week

  Are all of these ESG/sustainable ratings systems the same?

Answer:

Unfortunately not.

That's what makes it so difficult to invest with confidence in investment funds calling themselves sustainable or socially responsible.

What are ESG ratings?

ESG ratings are intended to holistically

analyze a company's environmental, social, and governance-related practices

. Companies are given an ESG ranking based on evaluations of how the company manages its sustainability, how it treats employees, suppliers, customers, and communities, and how it deals with accounting, regulations, employee pay, shareholder rights, etc.

The Rise of ESG

Investors and consumers have become more concerned with corporations' role in major societal issues like climate change, racial injustice, wealth inequality, and others.

Corporations are applying greater focus on improving their ESG rankings to capture more sales and investment capital.

Investors held

$17.1 trillion in assets with ESG criteria

at the beginning of 2020, up from $12 trillion in 2018. Over

85% of investors considered ESG criteria

in their investments in 2020.

Who's doing these ESG ratings?

MSCI is the world's largest provider of ESG ratings

and has been measuring the performance and practices of company stocks for decades. MSCI determines ESG ratings by

assessing a company's resilience to environmental, social, and governance risks

then scores companies as leaders (AAA, AA), average (A, BBB, BB), or laggard (B, CCC) based on how well they manage those risks relative to industry peers.

MSCI intends to

help companies evaluate a broader range of risks to their business, not to measure the company's impacts on the environment/society

. MSCI's "water stress" metrics, for example, evaluate whether

the community has enough water to supply the company

, not whether the company is putting stress on the community's local water supply.

MSCI's scores are also very industry-specific.

For example,

MSCI gave major oil producer Shell an ESG rating of AA

, calling it an ESG "leader." So

one of the biggest polluters in the world

can still get a good ESG rating simply because it's managing its risks better than the rest of the oil and gas industry.

Sustainalytics is the world's second-largest ESG provider.

Like MSCI, Sustainalytics' rating system identifies ESG

risks that can affect a company's long-term performance for investors

, rating the company's risk from negligible (0-10) to severe (40+) risk. Sustainalytics' methodology is proprietary, and it uses its discretion to exclude certain risk industry factors from its calculations as "unmanageable." For example, Sustainalytics may

factor carbon emissions out of its calculations for an oil and gas company

"is not able to fully eliminate all its risks related to carbon emissions."

More and more organizations are rising to improve the evaluation of corporations' holistic social, economic, and environmental impacts.

Here are two of our trusted partners taking different approaches:

JUST Capital is a research nonprofit that comprehensively ranks companies

on ESG issues that are most critical to stakeholders (aka company workers, shareholders, customers, communities, and the environment).

JUST Capital surveys Americans

to understand what issues they care most about, focusing on topics such as fair pay, equal treatment of workers, job creation, strong communities, and commitments to a healthy planet. JUST analyzes a wide range of data on the priority topics and releases a new

ranking system that prioritizes the human-centric issues that matter to Americans

, not the broader issues that could put company profits at risk.

Ethos ESG

believes in enhancing the current research process and the reputation of ESG ratings by

focusing on impacts first, measuring how companies impact society and the environment, not the other way around.

Ethos is a more customized ESG data and software tool for financial advisors, asset managers, and investors that focuses on a corporation or fund's impact on specific causes like racial justice, climate action, mental health, gender equality, and more. So Ethos looks at the company's contribution to climate change, not whether or not the company is at risk of policy violations or loss of revenue due to climate-related issues.

Company rating example: Exxon Mobil (XOM)

Exxon Mobil

is the world's largest oil refiner and

one of the top-ten polluters

.

MSCI ranks Exxon Mobil as "average"

compared to 28 others in the oil and gas industry, with an overall score BBB. According to MSCI, Exxon is lagging in its efforts to manage the environmental impact of its operations because it would contribute to a climate disaster but scored average in all other critical issues, including carbon emissions, toxic emissions and waste, and community relations.

Sustainalytics ranks Exxon Mobil as High Risk

with an ESG Risk Rating of 37.7 because Exxon's exposure to various risks is considered high, but Exxon's management of those risks is deemed to be strong. Sustainalytics was the most challenging provider to find details on how this score was determined.

JUST Capital ranks Exxon Mobil with an overall score of 66.2

, ranking

89th of 954 companies

. JUST assessed how the company invests in its workers, supports its communities, prioritizes good governance, treats its customers, and minimizes its environmental impact.

Ethos ranks Exxon with an overall score of F

(14), ranking in the

bottom 10% of all companies

. Ethos ranked Exxon poorly in racial justice and civil rights, accountable institutions, clean water access, and 11 other categories. Ethos did not give Exxon an 'A' rating on any metric.

So what do we do?

As we can see,

one company can receive a vastly different rating from one provider to another.

At Share Scoops,

we believe the public, not financial institutions, should decide whether a company is doing enough

for its employees, their communities, and our planet. That's why we ask you to vote in our scoops. We want you informed, educated, and empowered to have an opinion. We're building the platform to amplify our generation's voices and bring accountability to our economy. Get excited. Change is coming soon, and we're happy you're a part of it.

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💙 The Share Scoops Team

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