MIT Sloan Sustainability Initiative
The Aggregate Confusion Project
The portion of assets invested that rely in some way on ESG ratings has increased 34% since 2016.
Capital markets are moving fast to incorporate Environmental, Social, and Governance factors.
The problem? ESG data are noisy and unreliable.
We found the correlation among prominent agencies’ ESG ratings was on average 0.61; by comparison, credit ratings from Moody’s and Standard & Poor’s are correlated at 0.92. This ambiguity around ESG ratings creates acute challenges for investors trying to achieve both financial and social return.
The Sustainability Initiative is working to solve this problem through a program of research to improve the quality of ESG measurement and decision making in the financial sector. Our first step was to characterize the problem in our paper “Aggregate Confusion: The Divergence of ESG Ratings”.
With our corporate members, we are charting a course toward more rigorous, coherent methods for ESG integration.
ESG rating is still a young field, and the definition of sustainability is by nature a fluid one. What’s important today might not be important tomorrow.
Aggregate Confusion Project Scope
Each member organization will have slightly different business objectives, internal capabilities for ESG research, and priorities among ESG issue areas; but broadly we understand there to be a few tasks common to all:
Reduce the level of noise in measuring specific ESG categories such as labor treatment, carbon emissions, and product safety;
Understand the effect of ESG-driven investment flows on stock price and firm behavior;
Develop smarter ways to aggregate ESG factors into composite indices;
Reliably assess investor preferences to enable ESG indices to be more customized and attuned to investors’ values.
Building a sustainable investment capability inside your firm is a process of engaging people and building their skills and knowledge. Our intention is that our members will have access to top researchers, and the opportunity to engage with our entire team and suite of activities to build their firm’s capacity.