Sustainable investing is a topic we cover extensively in the form of systematic ESG investing strategies and/or blogs. Enormous capital allocation decisions are based on ESG ratings given by various agencies. The problem is that there is no actual normalization and standardization, which creates wrinkles on the faces of hedge and pension fund managers when making those critical individual equity allocations, be they inclusions or exclusions.
Ehling, Paul and Sørensen, Lars Qvigstad (January 2023) new paper analyzes the portfolio choice consequences arising from the well-known divergence of ESG scores. From a risk point of view, the optimized ESG portfolios differ more across each other than they differ relative to the benchmark, suggesting that the different rating agencies’ scores result in substantially different portfolios.
And how dissimilar are ratings among the agencies? We find staggeringly comic that ratings of Warren Buffett’s (and Charlie Munger’s) Berkshire Hathaway (NYSE: BRK.B) disagree by a large margin (see red ellipses in Figure 2 below). While Sustainalytics give it an outperforming rating, FTSE and MSCI regard it as one of the top laggards.
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