AQR and MFS Partner With MIT to Solve ESG Data Problem

Asset managers have signed on to work with the Massachusetts Institute of Technology to address a common headache for environment, social, and governance investors: the lack of consistent, quality data. 

Three managers — MFS Investment Management, AQR Capital Management, and Asset Management One — and solutions provider Qontigo, will be founding members of the MIT Sloan Sustainability Initiative’s Aggregate Confusion Project, which seeks to solve the problem of “noisy and unreliable” ESG data, according to the ACP’s website.

Together with Massachusetts Pension Reserves Investment Management Board, which signed onto the initiative last year, the four firms will work with MIT researchers to explore new ESG measurement techniques.

According to the ACP, the ESG ratings of prominent agencies have an average correlation of just 0.61. “By comparison, credit ratings from Moody’s and Standard & Poor’s are correlated at 0.92,” the group said on its website. “This ambiguity around ESG ratings creates acute challenges for investors trying to achieve both financial and social return.”

In fact, researchers from  MIT and the University of Zurich found that the correlation of ESG ratings from different index providers ranges from 0.38 to 0.71. These findings, published in a paper titled “Aggregate Confusion: The Divergence of ESG Rating,” mean that “the information that decision-makers receive from ESG rating agencies is relatively noisy.”

This has far-reaching consequences, according to the paper. For example, ESG performance can’t be well reflected in security prices. The lack of consistent ratings also sends out “mixed signals” to companies that aim to improve their ESG ratings. 

Robert Wilson, ESG research analyst at MFS, said his firm can’t make ESG investment decisions solely based on ESG ratings due to all the noise. To vet out companies with good ESG performance, MFS often needs to conduct rigorous fundamental analysis and bottom up research.  

According to Wilson, it’s still difficult to identify the impact of ESG analysis on returns. “I don’t think we have found an answer yet,” he said. “That’s why we have joined the MIT initiative. We’d like to understand how various academics address the issue.”

In its announcement Wednesday, MIT said that a primary goal of ACP is to “reduce the level of noise in ESG measurement, both in specific categories such as labor treatment, carbon emissions, and product safety, and in aggregated indices.”

Each of the five founding members will contribute their own expertise to the sustainability initiative. For example, the almost century-old MFS is a pioneer in the mutual fund space, while AQR specializes in quantitative investment strategies. Asset Management One is one of the largest asset management companies in Asia and helps manage the Japanese Governance Pension Investment Fund. 

“Each member organization will have slightly different business objectives, internal capabilities for ESG research, and priorities among ESG issue areas,” according to ACP’s website.

“Our five founding members of the ACP will serve as valuable thought partners with our research team,” Roberto Rigobon, professor of applied economics at the MIT Sloan School of Management and one of the research paper’s authors, said in a statement. “By providing financial support for the project and sharing their experiences with ESG integration, they will be integral to developing a more robust approach to sustainable investing. The challenges they’re addressing in using ESG data will help guide our research and the implementation of new ESG measurement techniques we develop together.”