Florian Berg's research at the MIT Sloan School of Management addresses the overall impacts of not having a standardised process for ESG investment rating.
Environmental, Social and Governance (ESG) investments are predicted to surpass $41 trillion in 2022, as per Bloomberg Intelligence’s estimates. However, the absence of benchmarks in how ESG investments are rated puts fund managers' reputations at risk, as many consultants are offering evaluations using different approaches and using various data sets.
Moreover, if standards aren't established, the value of ESG investments for those who buy them would be compromised. Lawyer John Quinn of Quinn Emanuel states that there could also be a possibility of lawsuits, as told to Forbes. As Berg's study notes, comparing ESG performance across organisations and investment portfolios will be challenging owing to the various assessment processes for ESG investments.
The confusion created by several rating systems stifles the motivation to enhance ESG. This might have a detrimental impact on ESG asset pricing and research, as there is no standardised data. Moreover, major geopolitical and economic events, like the European war, is compelling firms to be more accountable for their actions.
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[3 minute read]