Practical Applications of The Unreasonable Attractiveness of More ESG Data

Abstract

In The Unreasonable Attractiveness of More ESG Data, from the November 2021 issue of The Journal of Portfolio Management, authors Mike Chen and George Mussalli (of PanAgora Asset Management) and Robert von Behren (of Google Research) examine how the amount of publicly available data on a company’s ESG (environmental, social, and governance) standards can affect the scores the company receives from ESG rating services. Sustainable investing has seen huge recent growth, but there are major deficiencies in publicly available data on companies’ ESG practices. The authors assess whether the amount of public data on a company affects its ESG score.

The authors found that, on average, the more public data there is on a company, the higher the company’s ESG score—and the lower the interest rate it pays to secure funding. On the other hand, there was no consistent correlation between higher ESG scores and better actual ESG metrics (like number of women on boards). Therefore, data quantity appears to drive ESG scores, which indicates quantity bias among rating providers. The authors suggest that companies publish more ESG data to improve their bottom line but warn investors not to rely on ESG scores alone.