Jones, Matthew and Jarvis, Andrew (2023) The illusion of objectivity in the rating agencies’ evaluation of ESG impacts and risks : Exploring the potential of a new approach to assessing company ESG performance. Masters thesis, Lancaster University.
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Abstract
Asset managers and investors have been slow to respond to climate and environmental issues. This is changing. Growing public awareness, increasing pressure from governments and a climate that is visibly warming have jump-started a new wave of ‘Environmental, Social and Governance’ (ESG) initiatives, all aiming to incorporate these elements into investment decision-making. To date, ESG data providers have largely focused on offering company- based quantitative metrics to investors. Although helpful, these metrics lack transparency and have been critiqued heavily by academics, industry professionals and increasingly journalists and retail investors. This thesis offers an alternative, more holistic way of understanding a company’s ESG impact and management, asking if an approach that emphasises the need for transparency and openly subjective assessments improves investors’ ability to make informed decisions on ESG issues. With this in mind, an assessment framework was developed and tested, that evaluates companies against eight criteria, focusing particularly on environmental factors. Fourteen listed equity companies were then assessed using this framework to inform decision-making for a large UK-based asset manager. We found this openly subjective approach provided greater insight for asset managers that allowed them to achieve more effective engagements with their holdings. Moreover, the tool displayed utility in educating asset managers on particular ESG issues as well as in alternative consulting scenarios, where the tool was used directly with the companies in question. Rather than concealing the criteria for assessment, the thesis outlines a structured, evidence-based decision-making process for the assessment of each company. Additionally, the work highlights the utility of embracing the subjective judgement of the ESG researcher within the assessment process, rather than masking this subjectivity in the hopes of increasing assessment objectivity. Although this utility may be limited to specific consulting scenarios, due to the limited scalability and repeatability of these subjective focused assessments.