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ESG stock performance depends on who ranks

Money Pour into high-performing stocks Issues such as building a diverse workforce and reducing carbon dioxide emissions. However, understanding the performance of high-rated and low-rated companies is nearly impossible due to inconsistent valuation methods.

A closer look at the ratings and performance of stocks ranked by the three major providers that provide data on environmental, social and governance standards reveals that corporate ratings can vary significantly.

Depending on the time period and provider, top-ranked ESG stocks may outperform or lag the market. Low-ranked stocks, which are generally polluted and poorly treated by employees, may outperform top-ranked ESG stocks and the market as a whole.

It is inconsistent which group wins and which loses, as the company rankings vary widely from provider to provider. ESG scores measure multiple factors, including financial conditions, the risks posed by climate change, and the company’s efforts to mitigate them. Data contributors say ESGs work for a long time and investors can use scores from multiple evaluators to create their own strategies.

Ratings are receiving new attention as the Securities and Exchange Commission is considering regulations Disclosures on areas such as climate change exposure And carbon dioxide emissions.

The Wall Street Journal analyzed approximately 500 US companies rated by all three companies and looked at stock performance in 2020 and 2021.

The journal categorized companies into three groups (ESG leaders, average performers, and lagards) based on ratings assigned by the company-owned data provider Refinitiv.

London Stock Exchange Group,

Index provider

MSCI Co., Ltd.

And Sustainability Unit

Lucifer Co., Ltd.

The journal analyzed their performance by calculating an evenly weighted index for each category.

The share of companies that Refinitiv has determined that ESG indicators are performing poorly has increased by 26% since the beginning of this year. Top-marked companies increased 14% over the same period.

In Sustainalytics, ESG top companies rose 26% over the same period, outpacing lower rated companies. At MSCI, the average company based on ESG scores was the winner, beating both the lagging companies and the leaders.

Many of the 494 companies analyzed by the journal are large cap stocks. As a group, they were above the S & P 500 and Dow Jones Industrial Average this year.

The reason for this difference is that each evaluator often uses different data sources and procedures to create scores that highlight different aspects of a company’s behavior. Some methodologies assign scores compared to competitors in the same industry, while others assess absolute risk based on significant exposure to a company’s ESG issues.

“Many of our institutional clients need multiple diverse perspectives on ESG to make more informed decisions,” said Sustainability Methodology and Portfolio Research Executive. Director Hendrik Garz said.

Investors are pushing ESG funds to new heights in 2020, and federal agencies are watching. The WSJ explains why regulators consider ethical and sustainable investment funds to be reviewed.Photo Illustration: Alex Kuzoian

The performance of the top and bottom ranked stocks by last year’s ESG standards was different from this year’s. At Refinitiv, the top scorers in 2020 beat the low-ranked scorers, but this year they were behind them. In the case of MSCI, Lagard won by 46% last year, but lost in 2021. In last year’s Sustainability, the average rated company was the winner.

Equity performance in 2020 and 2021 will vary significantly overall. As economic activity moved online, tech stocks, which tend to have high ESG scores, skyrocketed last year. This year, more economically sensitive companies such as airlines, cruise companies and hotels have recovered.

Still, the performance of high-ranked and low-ranked companies is largely inconsistent, indicating that ranking issues are not relevant to a particular type of market.

Ranking companies say their data is focused on longer periods of time. Elena Filipova, director of sustainable finance at Refinitiv, said rankings are doing well in bear markets as they reward companies that have developed plans to minimize risk in areas such as climate change. I am. “It’s about long-term management based on a much longer-term agenda, such as decarbonization and human capital.”

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According to the survey, companies with high ESG scores tend to generate better revenue over a period of five to seven years than companies with low ESG scores, said Guido Giese, executive director of MSCI Research. “If you want to listen to ESG music, you need to switch to long-wave radio.”

By 2020, nearly $ 17 trillion in US assets were held by investors applying environmental, social and governance standards to their portfolios, according to the Sustainable Responsible Investment Forum.

Many companies are ranked differently by each ranking company.

Refinity blank

Wells Fargo

& Co. is in the top 10% of all 917 banking services companies tracked. MSCI gave banks an average rating and Sustainalytics gave it a low rating. Bank stocks performed the best of the 494 companies scored by all three evaluators in the first five months of 2021, rising 57% to $ 46.72 for each index calculated by the journal. Contributed to the rise.

A Wells Fargo spokeswoman said banks are stepping up their ESG-focused efforts to attract shareholders.

Professor Monica Billio of Ca’Foscari University in Venice, Italy, who co-authored a paper on ESG rankings last year, said, “Strong disagreements in the market do not make the market understand the validity of ESG. “.

“Scores can be confusing because companies are valued by one agency and very low by another,” she said.

Write to Shane Schifflet Shane.Shifflett@wsj.com

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ESG stock performance depends on who ranks

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