Pension Funds blog
by Guido Bolliger
If investors want to measure if they achieved their KPIs in terms of durability or assess their exposure to climate risk, they need clean and reliable data. Berg, Kölbel, and Rigobon (2022)[1] investigate the level of correlation between ESG-ratings provided by different agencies. They show that their cross-sectional correlations range only between 0.38 to 0.71. This is not surprising as each agency has its own methodology with its own components and weightings. For carbon emissions, a recent study performed by Markwat and Swinkels (2023)[2] investigate the correlation between carbon emission metrics provided by four distinct providers: CDP, ISS, Trucost, and MSCI. Their main results are reported in the figure below.
As a reminder, scope 1 emissions measure companies’ direct carbon emissions, scope 2 measure indirect energy-related emissions, and scope 3 measure emissions along the companies’ supply chain both upstream and downstream.
Source: Markwat and Swinkels (2023). MSCI World Equity Index (Equity developed markets, Equity DM), MSCI Emerging Market Index (Equity emerging markets, Equity EM), Bloomberg Global Aggregate Corporate Index (Corporate bond investment grade, Corp. IG), and Bloomberg Global High Yield Corporate Index (Corporate high yield index, Corp. HY).
We can draw several conclusions from the results reported in the figure:
- First, there are very low discrepancies across providers for scope 1&2 emissions. This is not surprising because they are easier to measure (they require no complicated modelling assumptions) and they fall inside a company’s direct management.
- Second, discrepancies increase when scope 3 emissions are included. Scope 3 emissions are more complicated to measure than Scope 1&2 ones. However, the correlations range between 64% (CDP-MSCI for Corp. HY) and 81% (ISS-Trucost for Equity DM). It is far better that the correlation between ESG metrics as documented by Berg, Kölbel, and Rigobon (2022).
- Finally, the correlations between providers seem to be lower for Emerging Market equities and High Yield bonds.
As shown by these results, the significant efforts that have been made to improve the quality of companies’ carbon footprint data are starting to pay off. Therefore, considering the urgency of solving the climate crisis, data quality should not be an excuse to do nothing, and asset owners can rely on available data. Again, asset managers and consultants have the responsibility to explain and understand the different methodologies used to compute climatic metrics as well as their pros and cons.
[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3438533
[2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4346300
