The concept of ESG scores – aggregating hundreds of indicators from diverse and complex topics – is outdated, particularly when repackaged by the investment management industry as an investment signal. The time for change has come.
ESG scores limit true price discovery
Financial markets play a crucial role in price discovery. The trading activity of investors determines the true value of an asset, reflecting all publicly-available information. Such information includes anything that is material to the value of the company including its environmental, social, and governance practices.
The wide-ranging reliance of the investment management industry on aggregate ESG scores by third-party rating agencies limits this true price discovery. Uncovering as of yet unrevealed information on the risks and opportunities presented by firms’ sustainable and responsible behaviours and tying them back to corporate valuation requires detailed data and profound research; yet most investors rely solely on the high-level information captured in ESG scores.