This article discussed the possibility of development of ESG evaluation/rating on the unified index by AI (artificial intelligence), integration into credit ratings, and utilization of SASB (Sustainable Accounting Standards Council) standard, and also considered future issues such as standardization of disclosure, short-termism, and concern over financial bias, with the aim of exploring the possibility and challenges of comparable ESG evaluation, as the basic viewpoint of improving market discipline for corporate activities by comparability of ESG information.
This article dealt with the potential of comparability improvement by S-Ray using AI as a unique tool to overcome ESG index variation, as well as comparable quantitative and qualitative information based on credit ratings and SASB standard. However, in general, AI has strengths in rapid analysis of enormous external information sources including media coverage, but on the other hand doubts about the bias of information sources and algorithms, including S-Ray, cannot completely be dispelled. In the future, it will be important to improve the institutional infrastructure to ensure reliability in order to develop as widely available comparable information that can be used not only in the capital market but also in various markets such as labor and consumption, while increasing the transparency of the object and method of evaluation.
Since GPIF, one of the biggest asset owners in the world, signed PRI, ESG investment suddenly became popular in Japan. The general method in ESG investment is ESG rating. Asset managers create their own ESG ratings by using ESG research vendor information and their original research. However, they evaluate ESG and fundamental research separately. As a result it is not ESG integration. The next goal for the asset managers is a real ESG integration. Many asset managers use 3 - 5 year earnings or cash flow forecast to evaluate the companies. They are required to use ESG information for the forecasts. In addition, they might use ESG information to calculate the risk of the valuation models such as DDM and DCF. Although ESG investment has the challenges like the low level of ESG research, it might be expanded and accepted as a long term investment method. Especially, the engagement has the potential to improve company values and might contribute to the stock market and the real economy in Japan.