Should investors watch out for ESG data revisionism?

While there’s no denying the need to make progress in ESG investment, many are still wary to participate, expressing concerns about the lack of consistency in ESG data. But a new study from the MIT Sloan School of Management claims the problem may run deeper than variations due to differences across providers.

In a recently released paper, researcher Florian Berg, along with Kornelia Fabisik and Zacharias Sautner of the Frankfurt School of Finance and Management, analysed ESG data from Refinitiv ESG, and claims to have found “widespread and repeated" changes to historical ESG scores from the provider.

Their study, titled “Is history repeating itself? The (un)repeatable past of ESG ratings," won the John L. Weinberg/IRRCi Research Award from the Weinberg Center at the University of Delaware.

“The incredible growth of sustainable finance has created a billion-dollar market for ESG data,” Berg said in a press release unveiling the paper. “Yet, we found that the data is not reliable or consistent.”

The ESG data for a given firm at any specific point in time in its history should remain the same, Berg explained, unless there’s a documented reason for a retroactive change. But the study found substantial changes to the data that the researchers claimed were unannounced and unexplained.

In one example, the researchers examined two versions of the same Refinitiv ESG data for identical firm years – one record from 2018, and one from 2020 – and found the median overall scores in the rewritten data were 18% lower than in the initial data.

In another analysis, the researchers compared ESG scores from February 9 and March 23, 2021 – just six weeks apart – and claim they found 85% of firms’ scores changed.

They allege that firms that performed better in a given year experienced upgrades in their E&S scores because of the data rewriting, with E&S scores in the rewritten data correlating to statistically significant positive impacts on a firm’s future stock returns.

Patently false?

But in a statement to Wealth Professional, a spokesperson from Refinitiv rejected the study’s claims that it made ESG data changes unannounced.

“The updated Refinitiv ESG Score, which was launched in 2020, was a response to customer feedback driven by the maturation of the market and the increase in data access that this brought, which encouraged a need to review and update how we scored companies,” the spokesperson said via email. “The changes made were the product of extensive engagement with the industry globally, with formal meetings on the topic which started in 2019, prior to the implementation in 2020.”

The spokesperson shared an online press release dated April 15, 2020 announcing enhancements to Refinitiv’s ESG scoring methodology, which it said were made following a series of industry roundtables along with four years of market feedback.

According to the spokesperson, the data provider engaged with some of the world’s largest asset managers and investment banks, as well as niche ESG investment managers, regulators, and representatives from academia.

“Our clients were not only aware of the new ESG Score program, many were actively involved in the process and kept frequently informed of the plans and the potential impacts of changes to methodology pre-implementation,” they said. “Whilst we welcome feedback on our scoring methodology, the conclusions drawn by the study, that changes were made in a secret and blackbox manner, are patently false - a fundamental flaw in the study.”

ESG scores are just the beginning

Dustyn Lanz, Senior Advisor at ESG Global Advisors, took the view that making ongoing changes to historical ESG scores without disclosing them is “indefensible,” and the study suggests there may be a need for a code of conduct or regulatory oversight of ESG data providers.

“I’m aware this study is disputed, but if it’s true we should be careful not to draw the false conclusion that these findings apply to all ESG data providers,” Lanz says. “There are many well-intentioned people working in the ESG data space. What happens at one firm is not necessarily happening at others.”

Because he sees greenwashing as an intentional misrepresentation of an investment’s green credentials, Lanz doesn’t think the research is indicative of a greater risk of greenwashing per se. But it does suggest that a major caveat emptor very much applies to buyers of ESG data, and that transparency and accountability must be maintained for the ESG data industry to “avoid irreversible reputational damage.”

The spokesperson from Refinitiv maintains that the data provider has been adhering to that principle.

“As a company, we have a track record of openness, transparency and strong collaboration with the market and our clients. The Refinitiv ESG scoring methodologies have been publicly available for close to 20 years,” they said. “Transparency and integrity are central to our business, products and processes.”

The takeaway for advisors, Lanz adds, is that ESG scores shouldn’t represent the beginning and end of a proper ESG evaluation process. Truly robust, in-depth ESG investment, he argues, should be built on a wider range of factors and considerations.

“An ESG rating company does not represent the ESG space as a whole. ESG factors are issues, and there are many ways to incorporate these issues into investment analysis,” Lanz says. “A score is just a starting point, and it should not be viewed as more than that. ESG scores are not a shortcut for proper ESG analysis.”

Read more: CDP raises concerns about fragmented ESG ratings regulations