The MIT Sloan Sustainability Initiative announced today the launch of the Aggregate Confusion Project, aiming to improve the quality of ESG measurement, with the Massachusetts Pension Reserves Investment Management (Mass PRIM) Board joining as a founding member. Mass PRIM manages the $75 billion Pension Reserves Investment Trust PRIT Fund, a pooled investment fund that invests the pension assets of the Massachusetts Teachers’, the State Employees’ Retirement Systems, as well as many other public retirement systems in Massachusetts that elect to invest in the PRIT Fund.
Building on research conducted by a team of scholars at MIT Sloan School of Management, the collaboration aims to address the difficulty in assessing a firm’s socially responsible behavior, caused by the significant divergences that often occur in the ratings provided by different agencies. According to MIT Sloan, the challenges in identifying sustainability leaders and laggards may result in stock and bond prices that don’t accurately reflect ESG performance, and may even dampen companies’ ambition to improve their performance due to the mixed signals they receive from rating agencies.
To address these challenges, the Aggregate Confusion Project aims to help develop more rigorous, coherent methods for ESG integration, based on four key goals it sees as relevant to asset managers, owners and regulators:
- Reduce the level of noise in measuring specific ESG categories such as labor treatment, carbon emissions, and product safety;
- Understand the effect of ESG-driven investment flows on stock price and firm behavior;
- Develop smarter ways to aggregate ESG factors into composite indices;
- Reliably assess investor preferences to enable ESG indices to be more customized and attuned to investors’ values.
Jason Jay, senior lecturer and Director of the MIT Sloan Sustainability Initiative, said:
“Working with Mass PRIM will significantly advance the Aggregate Confusion Project. Pension funds like PRIM have a unique vantage point on the challenges of integrating ESG into the investment process, and the importance of solving the measurement problem. They can help inform our research questions and methodology and be a testbed for innovative approaches.”
Michael Trotsky, CFA, Executive Director and Chief Investment Officer at Mass PRIM, said:
“We are very excited to partner with MIT Sloan on this project. As an investor, the discrepancies in ratings from agency to agency makes evaluating a company’s ESG impact extremely challenging. We hope that this project will reinvigorate the debate on how to improve those ratings, and we’re looking forward to being a part of the membership council, which will collaborate on implementation strategies.”