When Transparency Clouds Rather Than Clarifies: A Closer Look at Transparency Bias Within ESG Scores

Abstract

As more attention is paid to ESG and more data vendors enter the ESG ratings market, the importance of data quality cannot be understated. ESG scores and data are increasingly being integrated into investment decisions in order to enhance the sustainability profile as well as improve portfolio performance. However, ESG data is not immune to bias and although data transparency and disclosures seem to be a virtuous aim of and valuable indicator for sustainability, it too can be a source of bias. As discussed here, this bias can lead to over- or underestimating the true sustainability performance of companies, reducing the reliability of ESG scores.

Using regressions and other statistical methods on standard ESG data sets of more than 5000 publicly-listed firms, this paper demonstrates the clear presence of transparency bias within ESG scores, how, if uncontrolled, it leads to erroneous sustainability scores, as well as explains how RobecoSAM’s Smart ESG methodology can be used to effectively neutralize systematic transparency bias in order to distill idiosyncratic ESG scores that are more reflective of a company’s true sustainability performance. Armed with refined Smart ESG scores, investors can make better informed investment decisions and increase the predictive power of ESG data for a portfolio’s sustainability, risk and return performance.