Academic studies have found that ratings divergences are common. A recent study in the ECGI Working Paper Series in Finance found that the average correlations between ratings from six different providers was just 0.46.
The ratings system, however, is the core component of the index-based approach to ESG, which emphasizes quantitative screening of large numbers of securities using standardized measures. The ratings systems assign scores to companies as a measure of their sustainability risk. Index managers then use quantitative tools to assemble portfolios and manage risk. In a separate process, investors determine how best to advance both their financial and their sustainability goals.
“Actively-managed approaches to sustainable investing focus on a tailored assessment of individual investments, a future-focused evaluation of risk and opportunity, a holistic approach to portfolio risk management and a long-term commitment to stewardship,” the paper asserts.
“These activities supplement insights from sustainability ratings, which serve only as a starting point of analysis. In sum, active approaches take the long view, assess not just short-term risks but also the direction of long-term trends.”