Money is pouring into stocks that get good grades on issues like building a diverse workforce and reducing carbon emissions. But figuring out how high- and low-rated companies perform is nearly impossible because of inconsistencies in the way they are rated.
A close look at the ratings and performance of stocks ranked by the three major providers of data on environmental, social and governance criteria shows that companies can have widely different ratings.
Depending on the time period and the provider, top-ranked ESG stocks either beat the market or lag behind it. Low-ranked stocks, which are generally deemed to pollute more and treat their workers less well, can outperform top-ranked ESG stocks, and the market overall.
Since company rankings vary widely depending on the provider, which groups win and which lose is inconsistent. ESG scores measure multiple factors including financial situations, the risks posed by climate change and a company’s effort to mitigate them. Data providers say ESG works over the long term and investors can use scores from multiple raters to create their own strategies.
Ratings are getting new attention now because the Securities and Exchange Commission is weighing regulations around disclosure on areas like exposure to climate change and carbon emissions.
The Wall Street Journal analyzed nearly 500 U.S. companies rated by all three providers and examined their 2020 and 2021 stock performance.
The Journal sorted companies into three groups—ESG leaders, average performers and laggards—based on ratings assigned by Refinitiv, a data provider owned by the
London Stock Exchange Group,
and Sustainalytics, a unit of
The Journal analyzed their performance by calculating an equal-weighted index for each category.
Shares of companies considered by Refinitiv to be poor performers on ESG metrics have jumped 26% since the beginning of this year. Companies with top marks rose by 14% during the same period.
At Sustainalytics, the top-ranked companies for ESG rose 26% during the same period, beating those with lower ratings. At MSCI, the average companies based on ESG scores were the winners, beating both the laggards and the leaders.
Many of the 494 companies analyzed by the Journal are large-cap companies. As a group they outperformed the S&P 500 and Dow Jones Industrial Average this year.
The reason for the disparity is that each rater creates scores using different data sources and procedures, often emphasizing different aspects of the companies’ behavior. Some methodologies assign scores relative to competitors in the same industry and others assess absolute risk based on a firm’s material exposure to ESG issues.
“Many of our institutional investor clients require multiple, diverse viewpoints on ESG to help them make more informed decisions,” said Sustainalytics’ executive director of methodology and portfolio research, Hendrik Garz.
Last year’s performance of stocks ranked high and low on ESG criteria varied from this year’s. At Refinitiv, the top scorers in 2020 beat those ranked poorly, only to lag behind them this year. For MSCI, the laggards won last year, rising 46%, and then became the losers in 2021. The average-rated companies were the winners at Sustainalytics last year.
Stocks overall performed very differently in 2020 and in 2021. Tech stocks, which tend to have higher ESG scores, surged last year as economic activity shifted online. This year more economically sensitive businesses like airlines, cruise lines and hotels rebounded.
Still, there was little consistency in how high and low ranked companies performed, showing that the issues with the rankings aren’t linked to specific types of markets.
The rankings firms say their data are focused on longer time periods. Because the rankings reward companies that develop plans to minimize risk in areas like climate change, they have done better in bear markets, said Elena Philipova, director of sustainable finance at Refinitiv. “This is about long-term management on a much longer-term agenda like decarbonization and human capital.”
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Research has shown that companies with better ESG scores tend to generate better earnings over a five- to seven-year period than those with lower ESG scores, said Guido Giese, executive director of MSCI Research. “If you want to listen to the music of ESG, you need to switch to the long-wave radio.”
Nearly $17 trillion in U.S. assets were held in 2020 by investors applying environmental, social and governance criteria to their portfolios, according to the Forum for Sustainable and Responsible Investment.
Many companies were ranked differently by each of the rankings firms.
& Co. in the top 10% of all 917 banking services companies tracked. MSCI gave the bank an average rating and Sustainalytics ranked them poorly. The bank’s stock was one of the best performing of the 494 firms scored by all three raters in the first five months of 2021, climbing 57% to $46.72, helping to lift each index the Journal calculated.
A spokesman for Wells Fargo said the bank has boosted its efforts to attract shareholders focused on ESG.
Monica Billio, a professor at Ca’ Foscari University of Venice, Italy, who co-wrote a paper on ESG rankings last year, said “the strong disagreement in the market does not allow the ESG relevance to be understood by the market.”
“Scores can create confusion because a company is rated highly by one agency and given a very low grade by another,” she said.
Write to Shane Shifflett at Shane.Shifflett@wsj.com
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