Scoring And Being Scored


Moody’s Corporation announced today that it has received an ‘A’ score from CDP on climate action for the second consecutive year. The top score recognizes Moody’s as one of a small number of high-performing companies out of nearly 12,000 that are leading actions to cut emissions, mitigate climate risks and develop the low-carbon economy.

It is the business of rating agencies to judge other companies. Rating and being rated – that is the practice at Moody’s. Not all rating agencies follow this model.

“As a member of CDP’s Reporter Services and Supply Chain programs, Moody’s Corporation has demonstrated environmental leadership and commitment to curb climate change within their business, as well as among their suppliers. Looking ahead, we are excited to see their continued dedication to transparency and prolonged effort to securing a net-zero, sustainable world,” said Simon Fischweicher, Head of Corporates and Supply Chains for CDP North America.

In 2021, Moody’s accelerated its commitment to achieve net-zero emissions by 2040, bringing its original target forward by ten years, and advanced its validated, interim net-zero science-based targets. Progress on these targets can be viewed in the following reports:

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ESG Ratings: The Good, the Bad, the Ugly

Agencies, Methodologies

Headline ratings no longer enough

Prof. Dr. Nils Stieglitz gave a welcome address to the conference “ESG Ratings: The Good, the Bad, the Ugly” of the Corporate Governance Institute (Prof. Dr. Julia Redenius-Hövermann) at the Frankfurt School of Finance & Management, followed by Prof. Dr. Zacharias Sautner, showing data of Hartzmark and Sussman, 2019, proving that investors value sustainability. He introduces the subject “ESG Ratings in the Investment Process”.

“Corporate ESG ratings are the most unseful source of information”, says Zacharias Sautner. This is confirmed by various studies. ESG ratings provide data material to investment performance, supplement organization’s other research of corporate ESG performance/risk.

SustainAbility, an ERM Group company, is a think tank and advisory firm that works to inspire and enable business to lead the way to a sustainable economy. In 2010, SustainAbility undertook its first “Rate the Raters” project to better understand the environmental, social, and governance (ESG) ratings landscape and provide perspectives to help companies, investors and other stakeholders make sense of and derive more value from ESG ratings.

In general, investors recognize that ESG ratings and rankings are not going away any time soon. When
asked what changes and solutions they would like to see in the next five years the leading responses
from the survey were the following:

  • Improved quality and disclosure of methodology
  • Greater focus on relevant/material issues
  • Better linkage to company financial performance
  • Greater consistency and comparability across
  • rating methodologies
  • Greater engagement of rated companies in the
  • evaluation process
  • Consolidation of ratings

These expectations were reiterated in the interviews along with a desire for more timely coverage, more data, integration of ESG into financial reporting and the ability to evaluate corporate societal impact vs. just operational performance.

Dr. Florian Berg, Massachusetts Institute of Technology, spoke about the divergence of ESG ratings. Correlations of the varios raters’ ratings range from 38% to 71%. Based on data from six prominent rating agencies namely, KLD (MSCI Stats), Sustainalytics, Vigeo Eiris (Moody’s), RobecoSAM (S&P Global) the divergence into three sources. “We do not even know the truth, therefore we only can compare”, argues Florian Berg. “We describe ESG ratings in three elements.

  • Scope: which attributes are included?
  • Measuremaent: how ar e these attributes measured?
  • Weights: how are indicators aggreagted into one score?

Aggregation and mesurement are the biggest sources of differences. See Aggregate Confusion: The Divergence of ESG Ratings, 2019.

What are the implications for investors? According to Florian Berg, the following two tasks have to be accomplished: Clarify ESG preferences, scope and weights, and investors have to answer the question: What measurement methodology do you agree with most?

Ingo Speich, Head of Sustainability and Corporate Governance, Deka Investment, points to the fact that investors no longer look only at headline ratings, but dig deeply into the data. He outlines the problem that the regulator requires financial service providers to report on ESG criteria. However, the data required for this are not sufficiently reported by the companies concerned, so that the financial service providers are faced with the difficulty of collecting, processing and passing on this data.

Rating Agency Accused of Using Original, Then Rewritten Data

Agencies, Data

Refinitiv ESG’s rewriting not a one-time event

Prof. Dr. Kornelia Fabisik, Assistant Professor of Finance, Frankfurt School, reports on some discoveries at one of the ESG rating agencies at the conference “ESG Ratings: The Good, the Bad, the Ugly” of the Corporate Governance Institute (Prof. Dr. Julia Redenius-Hövermann) at the Frankfurt School of Finance & Management.

Refinitiv ESG is a key Environmental, Social, and Corporate Governance rating provider offering “one of the most comprehensive ESG databases in the industry”, and its ESG scores have been used (or referenced) in more than 1,500 academic articles since 2003. The scores were initially constructed by ASSET4, a company acquired in 2009 by Thomson Reuters, which became Refinitiv in 2018. Refinitiv ESG data are employed by major asset managers, such as BlackRock, to manage ESG-related investment risks.

“We document large rewriting of ESG ratings of Refinitiv ESG.” The same set of firm-year observations downloaded September 2018 and September 2020 provides evidence. For the full sample Kornelia Fabisik observerd a rewriting of 21% on average, 18 % median.

“Rewriting is not a one-time event”, warns Kornelia Fabisik. “Refinitv ESG continues to adjust the data ex-post, unannounced.”

“In April 2020, Refnitiv ESG changed the methodology used to determine the ratings.” There were two key changes: Treatment of boolean metrics and introduction of a propietary materiality matrix.

The ESG score deviations are related to firm characteristics, especially past stock returns. Firms that performed better in the past experienced rating upgrades. The ESG score deviations strongly affect the classification of firms into different ESG quantities.

“Has data rewriting stopped post methodology change? No,” ist the answer of Kornelia Fabisik, “the database changes on a weekly basis.” She shows concrete examples.

“ESG ratings industry follows an investor-pay model, whereby the data vendors compete on how useful their ratings are for ESG investments.”

“44% of carbon emission obsesrvations (Scope 1 CO2 emissions) have in some way been altered.” Specifically, 23.6% firm-years were added (i.e., data were missing in the 11/2019 download, but filled in for the 02/2021 download), 1.6% were deleted, and 18.4% were modified. The data rewriting affects all years and not just those closest to the end of the sample period.”

Prof. Dr. Kornelia Fabisik’s conclusions, as presented at the Frankfurt School conference:

  • The large differences in results that we document have implications for empirical test strategies using Refinitiv ESG data. Moving forward, researchers and investment professionals need to verify whether the original or rewritten ESG scores are needed to perform their tests.
  • For example, if the practitioners are unaware of the changes, asset managers could erroneously be benchmarked against the rewritten data that were unavailable at the time of portfolio formation (look-ahead bias).
  • She argues that the results reflect the incentive of the data provider to introduce a positive relationship between ESG scores and returns in the data, in order to demonstrate that their ESG scores are useful for data users developing ESG-related investing strategies.
  • Given that ESG research and ESG-related investment strategies are likely to grow even furhter, this is an important caveat for adhering to the status-quo.

Finance Working Paper N° 708/2020, August 2021, Abstract:

The explosion in ESG research has led to a strong reliance on ESG rating providers. The article documents widespread changes to the historical ratings of a key rating provider, Refinitiv ESG (formerly ASSET4). Depending on whether the original or rewritten data are used, ESG-based classifications of firms into ESG quantiles and tests that relate ESG scores to returns change. While there is a positive link between ESG scores and firms’ stock market performance in the rewritten data, the authors fail to observe such a relationship in the initial data. The ESG data rewriting is an ongoing rather than a one-off phenomenon.

photo of female engineer designing an equipment

TELOS ESG Fund Check Professional Launched


An engine room of ESG fund management is in the making.

EccoWorks GmbH, known in Germany for their sustainability consulting, and the long-standing specialist for fund ratings in the institutional sector, TELOS GmbH, have bundled their know-how in the field of sustainability to develop an ESG fund rating product as part of a cooperation.

The “TELOS ESG Fund Check Professional” rating product developed in the course of the cooperation is supposed to support professional investors in finding suitable asset managers who are qualified in the field of sustainability. With the help of the ESG rating offered at fund level, institutional investors, for example, can gain confidence that the managers they hire have the necessary experience and qualifications to integrate ESG within the funds they offer.

With an innovative approach, the focus is on the “engine room of fund management” and rounded off by an analysis of the fund’s financial performance. “The integrated rating based on qualitative and quantitative factors as well as the addressing of institutional investors clearly distinguishes us from other ESG fund ratings on the market”, emphasizes Prof. Dr. Henry Schäfer, managing partner of EccoWorks GmbH.

The TELOS ESG Fund Check Professional aims at all asset classes, including liquid as well as illiquid assets. Areas of investigation are the integration of ESG criteria within the investment approach itself, among other things, quality management as well as the responsible fund manager or the team behind the fund and their embedding in networks. The knowledge gained in the rating process is summarized in a meaningful certificate and the rating (platinum / gold / silver …) is also summarized in a rating seal and thus made transparent to the market and thus to investors. The fund management also receives a strengths / weaknesses analysis.

With the TELOS ESG Fund Check Professional, the two partners also want to build a bridge between asset managers and professional investors.

Moody’s Heatmap Shows Heightened Environmental Credit Risk

Agencies, Criteria, Models, Read

Moody’s analysts have revised their environmental classification to reflect evolving environmental, social and governance standards, disclosure frameworks and market conventions among issuers and investors.

Environmental risks can arise from regulatory and policy issues, hazards or a combination of both. The five environmental categories Moody’s considers most material to credit are

  • carbon transition,
  • physical climate risks,
  • water management,
  • waste and pollution and
  • natural capital.

Moody’s identified these categories, which apply to both public and privatesector issuers, based on their alignment with evolving market standards and conventions.

These changes represent a reclassification and/or renaming of Moody’s previous environmental categories. The previous environmental categories were featured in an earlier, 2018 environmental heat map report. The analysts underline that it is not a change in the specific environmental issues being considered. It is important to understand that rating changes can result from changed criteria, models and weightings as well as from changed framework conditions and new data from the organizations to be assessed.

Each of the five categories has been cited as a material consideration in their rating actions. Environmental considerations are becoming more relevant to the credit quality of Moody’s rated issuers. Moody’s points out that environmental credit risk will continue to grow.

In their “sector in-depth” report “Heat map: Sectors with $3.4 trillion in debt face heightened environmental credit risk” Moody’s identifies sixteen sectors with $4.5 trillion in rated debt having very high or high inherent exposure to carbon transition risk. Eighteen sectors with $7.2 trillion of debt have high inherent exposure to physical climate risks and again eighteen sectors with $5.2 trillion in rated debt have very high or high inherent exposure to waste and pollution risk.

Eight sectors with $747 billion in debt face heightened inherent exposure to natural capital risk. Six sectors with $925 billion in debt have very high or high inherent exposure to water management risk, according to Moody’s.

ESG – Global: Heat map: Sectors with $3.4 trillion in debt face heightened environmental credit risk (53 pages).

Trust In a Time of Uncertainty

Criteria, Read

The corona pandemic is far from over. This is especially true if you do not look at it from a purely medical point of view, but also from the perspective of the social and economic consequences. The virus divides the opinions of experts: on the one hand those who warn of the dangers of the virus and are concerned that not enough is being done to combat the spread of the virus, on the other hand those who warn of excessive measures and see the many implications that are not medical but societal, social and economic.

Most people cannot call themselves experts on any of the questions raised. The majority are not medical professionals, sociologists, economists or whatever expertise is still needed to assess the various consequences of both the virus and the measures taken. Those who cannot judge for themselves have to rely on the judgment of others. That requires trust. It is particularly about trusting the decisions of others – politicians, doctors, entrepreneurs and many others who are responsible for their fellow human beings.

The operators of social media are increasingly aware of their responsibility. For example, LinkedIn presents a paper entitled “Trust in a Time of Uncertainty“. It addresses the partnership between companies and their customers and business partners. “Trust is of the utmost importance in uncertain times,” argue the social media experts at LinkedIn.

The Edelman Trust Barometer 2020 shows that despite a strong global economy and also at times of full employment, none of the four social institutions – government, companies, non-governmental organizations (NGOs) and the media – are trusted anymore. The cause of this paradox lies in people’s fears of the future and their role in it. This is a wake-up call for these institutions to find new ways to effectively build trust: to reconcile competence with ethical behavior. Social credit ratings could play a role here. Edelman is based on 34,000 surveys in 28 markets worldwide.

In most countries, confidence was fueled by economic growth. This continues in Asia and the Middle East, but not in developed markets, where income inequality is the more important factor influencing confidence levels today. The majority of respondents here do not believe they will be better off in five years’ time, and more than half of those surveyed around the world believe that capitalism in its current form is doing more harm than good to the world.

Inequality is no longer seen as a gratifying result of freedom, but as a malfunction of capitalism. In this way, no longer state interventions and privileges, but capitalism are made responsible. The injustice of state intervention is neither recognized nor understood. The privileges based on state coercion force competitors out of the market who do not have access to those who know how to privilege certain organizations and companies through regulation and create competitive advantages. In practice, only large or highly profitable companies can afford to actively influence legislation.

Capitalism only thrives on the basis of free decisions by as many people as possible. The freedom to decide about one’s own work results and to weigh between consumption and investment leads to the optimal allocation of resources in capitalism. Edelman shows how far the population in developed countries is now from an elementary understanding of the connection between freedom and capitalism.

According to Edelman, the result is a world of two different trust realities. The informed public – wealthier, educated, and frequent consumers of news – trust any institution far more than the general public. In most markets, less than half of the masses trust their institutions to do the right thing.

In the 2020 Edelman Trust Barometer, the Trust Index is an average of the percent trust in NGOs, corporations, government and the media. NGOs, companies, government and the media enjoy the greatest trust in the world among the people of the People’s Republic of China. In the overall population of China, trust increased in 2020 compared to the previous year (from 79% to 82%). The opposite is true in countries such as the USA (from 49% to 47%) or the United Kingdom (from 43% to 42%).

These results can no longer be explained solely with restrictions on the freedom of the press and freedom of expression in the People’s Republic of China. Because of the large population, many Chinese families have a wide network of contacts around the world. The Chinese are among the people who love to travel. The economic rise allows millions of Chinese to travel to all countries in the world. In Germany, too, travel opportunities for the Chinese were not restricted by the Chinese government, but rather by a restrictive German visa policy. The level of knowledge of educated Chinese about the conditions in Germany is much better than that of Germans in China. China’s leading position in terms of popular trust in government, businesses and organizations therefore requires further research.

Trust is one dimension of a company’s reputation. This reputation has been systematically measured in many pilot projects in China since 2014 and combined in ratings. After initial mistakes, the corona crisis brought the Chinese leadership, among other things. therefore faster under control, as it relied on help from companies and organizations that have good ratings. The crisis is not only about financial stability, but also about the trustworthiness of socially responsible behavior. Therefore, social credit ratings were used to select well-reputed companies. More on this and on many other aspects of social credit ratings in the Springer-Verlag book.