As ESG ratings invite scrutiny, the space needs to evolve
Synopsis: ESG ratings are under increased scrutiny from institutional users such as asset managers. This is mainly because just like any other neat quantitative categorization of qualitative information, ESG ratings also suffer from problems such as lack of transparency, inconsistency among different rating agencies, and not enough appreciation for subjective assessment. No wonder there are investment managers who have openly declared that they would rather have their own internal frameworks to assess the ESG performance of their portfolio companies and potential interests than rely on ESG ratings. However, ESG ratings of external vendors are a good starting point for many asset managers to think more holistically and prepare what works best for them. The bottom line is that ESG ratings are here to stay, but will have to undergo a major overhaul to become more useful for investment managers.