What are the incentives in the ESG ratings industry?
ESG ratings industry follows an investor-pay model, whereby the data vendors compete on how useful their ratings are for ESG-related investment strategies.
A key consideration for data users when selecting among ESG rating providers is how well the different ESG scores do in predicting returns.
The credit ratings industry follows an issuer-pay model. This is very different from the investor-pay model!
In fact, according to a SustainAbility (2020) Rate the Raters survey of customers of ESG ratings agencies:
"When asked what changes and solutions they would like to see in the next five years the leading responses from the survey were to: improve the quality and disclosure of rating methodologies, a greater focus on material issues and a stronger link to company financial performance."
Preferred changes and solutions in next five years (Rate the Raters 2020 survey):
There is suggestive evidence that a link between ESG ratings and stock market performance was retroactively written into to the historical database by one of the major ESG ratings providers...
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