In a Substack blog post yesterday (13 November), investment strategist Joachim Klement cited a study from Columbia and Emory University published in September titled ‘ESG Ratings of ESG Index Providers‘, which found that ESG ratings from MSCI may be biased.
In the paper, the authors said the results “raised concerns about the credibility of ESG ratings and underscores the need to understand the incentives that shape the production of ESG ratings”.
Comparing MSCI ESG Research, which receives most of its revenue from selling index licences, and Refinitiv, which gains the majority of its revenue from selling data, the paper found that ESG ratings from MSCI were systematically higher than Refinitiv, even after accounting for rating methodology differences.
Liberum’s Klement said the study indicates “there may be even monetary conflicts of interest at play in some case”, as companies with better performance “seem more likely to be upgraded by MSCI ESG and then included in the MSCI ESG indices”.
“Companies with poor share price performance seem more likely to be downgraded and then dropped from the MSCI ESG indices. No such effect is visible in Refinitiv ESG ratings,” he said.
“It seems that MSCI ESG ratings change if the share price performance of a company changes. This happens despite the lack of change in ESG data and the fact that both MSCI ESG and Refinitiv use the same publicly available ESG data for each company.”
Klement added: “Whether this is intentional or just coincidental is impossible to tell from the study, but one thing seems clear to me. ESG ratings should be independent of share price performance and while this is the case for Refinitiv’s ratings, it is not for MSCI ESG ratings.”
An MSCI spokesperson said: “The design and calculation of MSCI indexes is functionally separate from the assignment of ESG ratings.
“MSCI ESG Indexes utilize ratings sourced from our ESG Ratings business but is not involved in the ratings process which is separately managed with editorial independence. MSCI ESG Research maintains a strong culture of independence and transparency in providing ESG ratings to global investors.”