Deficiencies in ESG Ratings

The private bank Berenberg published a very decisive result in a study: most ESG ratings on the market are unsatisfactory and do not allow investors to see the investment opportunities.

It is also a fact that small companies in particular are usually not assessed according to ESG criteria.  The ratings of large companies are also better than those of small companies, even if they operate very sustainably. Turnover, investments and profits at companies that have a good rating with the three large providers generally flourish more slowly than those that fall into the lower rating range. This could lead to risks being overlooked and attractive opportunities being missed. A low ESG rating also distorts the relationship between the share price and the actual value of the company. Since there is no standard in ESG assessment and thus hardly any comparability of ratings, the ESG risks and opportunities must be assessed by investors themselves when making their investment decisions.

It is advised that this ESG analysis should not be submitted exclusively to rating agencies, but should also be integrated into the work of a fund manager, whereby smaller companies often integrate ”ESG” very well, but this is usually not recognised by the rating agencies. The reason behind the observed discrepancies in ESG ratings between large and small companies is mainly due to the fact that small companies often cannot afford to disclose ESG data, as this work often requires a high level of resources. The expertise, time and resources required for ESG analysis must be developed internally by a portfolio manager.

Source: click here.