3rd video

Question 1

Corruption example with ESG ratings? Credit…

Answer 1

Traditional credit rating agencies, like S&P and Moody’s they started issuing ESG ratings now, and now it appears that those companies that already had a credit rating, they receive abnormally high ESG ratings.

Because a firm is already paying them to issue credit ratings, so they have inclination to give them a high score.

Question 2

Most important ESG rating providers? Rate the raters of 2020

Answer 2

MSCI (The only ESG ratings to which US ESG fund holdings are consistently related are those issued by MSCI), Refinitiv ESG, Sustainalytics (now Morningstar), S&P Global

are based on what investors said in surveys

Controlling for the MSCI ESG rating, the other ratings
* do not correlate significantly with ESG ownership
* do not explain any additional variation beyond what is explained by the MSCI ESG rating.
* Conclude that MSCI most important ESG rating for US ESG fund holdings.

Question 3

How to read stars in the tables?

Answer 3

learn

Question 4

What does t static means, which is showed in brackets in tables?

Answer 4

learn

Question 5

What usually happens when MSCI downgrades/upgrades ESG ratings of companies (From AA to B, or from B to AAA)? 24 months after they… Slide: 19

Answer 5

Two years after downgrade, ESG ownership is on average 13.1% lower; two years after an upgrade, it is 17.1% higher.

It is gradual over time. Not immediate

Upgrade: opinion about ESG performance improves. They increase holdings in that fund.

Question 6

ESG Ownership?

Answer 6

ESG Ownership: This typically refers to the proportion of a company’s shares that are held by investors who prioritize ESG criteria in their investment decisions. It can also reflect the degree to which a company is owned by ESG-focused funds or investors.

Question 7

ESG combined score? (ESGC).20

Answer 7

Overlays the ESG score with ESG controversies to provide a comprehensive evaluation of the company’s sustainability impact and conduct over time.

Question 8

ESG Score?.20

Answer 8

Measures the company’s ESG performance based on verifiable reported data in the public domain

Question 9

Analysts collect firm-specific data on over 630 dimensions (ESG related data points) from a variety of sources…what are those sources 0.21

Answer 9

annual reports, company websites, NGO websites, stock exchange fillings, CSR reports, news sources

content research analysts collect this. really labor intensive task

Out of those 630 points, they choose 186 most important ones. They have to be most comparable and most financially material (relevant or significant).

Question 10

(ESG) Self reporting data could be misleading because…

Answer 10

Firms can greenwash: self-report predominantly positive ESG information, pretend to care about ESG

Question 11

What is greenwashing?

Answer 11

Greenwashing happens when organizations do the following: Make broad sustainability claims without evidence. Overstate their positive environmental effects in marketing materials. Advertise products as eco-friendly, but source raw materials from unsustainable suppliers

Question 12

Refinitiv ESG rating range?

Answer 12

0-1

until 0.25 D, then C
from 0.5 is B
A is from 0.75

Question 13

Best in class? is more to E, and S, and not G. Why not G? What is best in class?

Answer 13

For governance, it is better to benchmark against country peers,. There are different legal constrains in different countries.
Best in class is relative to their class. It can still be unsustainable company, for example oil, but if you are more sustainable than other oil companies, you will get an A.

Question 14

How are ESG ratings typically constructed for MSCI?

Answer 14

Assesses companies’ management of financially relevant sustainability risks and opportunities along E S G. (financially relevant part is important!)

Might be similar ESG key issues which MSCI is tackling relative to Rifinitiv, but it is also different!

Question 15

! MSCI evaluates ESG performance based on the firm’s: 2 things

Answer 15

a) exposure to risk (exposure score)
Example: company’s exposure to carbon emissions regulation

b) capability to manage risks (management score)
Example: ability to reduce and manage carbon emissions

Issue score = exposure + management score

Performance across all issues is aggregated into raw ESG score (‘absolute’)
-which is weighted based on MSCI’s view of the financial materiality of the different issues.

Scores go from 0-10

Question 16

Product based ESG assessment? .39

Answer 16

Most ESG ratings focus on evaluating the conduct of firms - how the company operates.
MSCI and Refinitiv computers conduct of firms.

This might not be the best way to capture true sustainability of a company.

Another way to do so is to examine Product Based assessment.

Product-based approach not necessarily new
* Early data providers interested in firm’s involvement in “controversial business” (e.g, tobacco, alcohol,..)

Question 17

SDGs? .40

Answer 17

An intergovernmental set of 17 aspiration goals with 169 specific targets that were adopted by the United Nations General Assembly

1. no poverty
2. zero hunger
3. good health
4. Quality education and well-being
   etc. etc.

Most targets are to be achieved by 2030, although some have no end date

Question 18

MSCI ESG Sustainable Impact Metrics .41

Answer 18

MSCI ESG Sustainable Impact Metrics: identities companies that provide products and services that contribute to attaining the UN Sustainable Development Goals

Question 19

Conduct vs product based approach. I should know this difference!

Answer 19

learn

Question 20

MSCI ESG Sustainable Impact Metrics: Allow investors to measure their exposure to companies providing products and services that contribute to attaining the SDGs

Answer 20

17 SDGs translated into five actionable impact themes:
* Basic Needs
* Empowerment
* Climate Change
* Natural Capital
* Governance

each theme has a detailed list of products and services that contribute positively to sustainability themes.

Ex: affordable and clean energy is in climate change theme. Product could be: solar panel.

For basic needs theme -> good health and well-being ESG can be pharmaceutical products

Question 21

Green revenues? .47

Answer 21

Green Revenues: revenues derived from products and services that have positive environmental utility (e.g., preventing environmental degradation, adapting to climate change, etc.)

financial revenues derived from the ‘environmentally sustainable economic activities’ of a company

Question 22

Survey based approach? Professor did such an approach experiment

Answer 22

Calculate average survey responses at the sector-level (“consensus”)

1-5 scores
Allow “do not know”

Large sample of survey results might indicate a solid number for ESG rating

Question 23

What is RepRisk? .56

Answer 23

RepRisk: company that collects daily global news about negative ESG incidents (concerning both public and private companies)

They pick up controversies scores.