There is ‘disquieting’ evidence that environmental, social and governance (ESG) metrics differ considerably among rating firms, says new paper led by the Centre for Endowment Asset Management at Cambridge Judge Business School.
There is “disquieting” evidence that metrics to inform investors on environmental and other issues differ considerably across ratings services, concludes a paper led by the Centre for Endowment Asset Management (CEAM) at Cambridge Judge Business School.
The paper just published in the February 2020
edition of the Journal of Portfolio Management draws on a recent “Divest
or Engage?” conference organised by CEAM, which considered both published
and unpublished papers on environmental, social and corporate governance (ESG)
“The authors caution that investors need
to be aware of the disquieting evidence that ESG metrics differ considerably
across ratings services, and the choice of data provider can have a fundamental
impact on the ESG credentials of institutional portfolios,” the paper
“The choice of an ESG data provider may
have more far-reaching consequences than many investors are aware of.”
Papers presented at the October 2019 conference,
organised by CEAM in collaboration with the European Corporate Governance
Institute, included a detailed study of ESG rating discrepancies by Professor Rajna
Gibson of the University of Geneva together with Dr Philipp Krueger, Nadine
Riand, and Dr Peter Steffen Schmidt.
“A member of the audience observed that
the ESG rating discrepancies are in marked contrast compared to the strong
observed correlations between Moody’s and S&P ratings,” the Journal
of Portfolio Management paper says. “Moreover, the disagreement is
higher for larger, less profitable firms and firms without a credit rating.”
In parallel with the Journal of Portfolio
Management paper, a CEAM-led case on the debate in recent years at the
University of Cambridge over fossil fuel investment has just been published in
an ESG Special Issue of the Journal of Investing.
There are about £3.4 billion of endowment
assets under management by the Cambridge University Endowment Fund, or CUEF,
while the University’s 31 constituent Colleges hold about £4.6 billion in
additional endowment assets, the authors say.
“In contrast with other journal articles,
this one does not propose solutions,” the case study says. “Instead,
it asks the reader to consider the arguments and to take a position.”
On engagement, the case study notes that
previous research co-authored at Cambridge Judge Business School suggested
evidence for modest outperformance in managed assets after successful
shareholder engagement of companies regarding their ESG behavior.
“Whatever the recommended approach”
by the chief investment officer of CUEF and the university’s chief finance
officer (the two key figures in the case study), “full cognisance is
needed of the CUEF fund-of-funds structure as well as the fact that any further
moves toward responsible investing may require additional resources,” the
case study says.
“Moreover, consideration should be given
to the broader role of the University, given its particular strengths and
influence, in combating the climate crisis.”
The case study says that the University of
Cambridge has achieved returns significantly ahead of passive index-matching by
following a fund-of-funds approach, which involves holding a portfolio of other
investment funds rather than direct investment in stocks or other securities.
Excluding certain stocks based on climate change issues would raise fears that
some fund managers would be unable to accept the University’s money, which
could restrict flexibility and lead to lower returns.