SEC Chairman Jay Clayton warns of risks of improper use of ‘imprecise’ ESG ratings

Summary

Chairman Clayton warned that combining environmental, social and governance metrics into a single ESG rating is an imprecise way of rating companies, and that asset managers should think carefully about how they use these metrics. There are 307 ‘Sustainable funds’ in the US with $119.3 billion assets under management as of the end of March 2020.

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Analysis

The credibility and value of ESG ratings is an important issue, and Chairman Clayton is right to raise these concerns. If ESG ratings are to become more than just a label and have real value, they should be measured against easily defined objective benchmarks. These benchmarks should be grounded in metrics that can be shown to accurately measure compliance and quality levels versus the metric. Without this, it is unlikely that these metrics will be universally accepted or adopted. Stakeholders including regulators, investors, company management and boards of directors need to have specific metrics for specific risks and need to be able to measure how these metrics change over time.

In addition, asset managers that promote good ESG governance as being good for investment performance need ratings that not only accurately measure compliance, but also are correlated with investment returns. In other words, does being highly rated in E, S or G translate into a better performing stock price consistently over time?

Cyberhedge’s cyber governance ratings do just that, with the equity prices of the highest rated 5-Star rated companies outperforming the lowest rated 1-Star companies, providing market-based proof that cyber governance impacts shareholder value.

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Denis Bolshakov

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What are the Cyberhedge Cyber Governance Indices?

These first ever benchmarks prove good cyber governance matters to shareholder value. They measure stock market performance of companies with good and with bad cyber governance scores. Scores are based on Cyberhedge’s proprietary cyber governance rating methodology. Market performance is tracked by an independent firm. The results show that companies with good cyber governance outperform their peers in US, UK, and EU markets.

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