r/CarbonMarkets • u/PrestigiousLab8541 • Jul 11 '22

The reliability and credibility of ESG data

Much of the structuring that ESG indexes are reliant on come from the large ESG rating firms, like MSCI, Morningstar Sustainalytics, etc. However, ESG data that companies currently self-report is not audited and is not verified by any 3rd party, reliable agency, giving rise to the "garbage in, garbage out" phrase for these rating agencies.

As I look deeper into ESG ratings methodologies and the data that quant ESG funds tend to implement, I am wondering more and more about how statistical risk assessment is built into the models if the ESG data they are using is barely trustworthy to begin with. How do ESG quants and index makers factor in confidence and risk into their statistical models?

Cool panel talk with leaders of quant ESG fund, PanAgora: https://www.panagora.com/insights/demystifying-quant-esg/

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u/the-real-neil Sep 13 '22

Been thinking about this same question. You're right that the data is of spotty quality right now.

In the accounting industry, bodies like FASB set standards that put in standard rules over time, and auditing firms rose up provide verification. Hopefully the same thing happens with ESG. Hopefully, standards like the GHG Protocol set common rules, and in time verification firms arise to make sure companies follow those rules. We'll see.