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ESG ratings businesses - how robust are they really?

Sometimes, with all the information available it be hard to remember that the ethical/sustainable investing industry is still in its infancy. We have written before in these blogs about how an analysis by Alphinity of the ESG ratings from different providers had little co-relation.  

In a recently published report, the UK Financial Regulator (Financial Conduct Authority - FCA) have said that there is a 'clear rationale' for it to regulate the leading ESG ratings and data firms (MSCI, Sustainalytics, S&P).  The report was prepared after consultation, and some of the feedback included the following:

1. Some ESG analysts cover a significant number of companies for cost efficiency reasons

2. Questions were raised about the depth of knowledge of ESG rating providers analysts

3. Questions were raised about 'product bundling' where fund managers must buy big packages and only use a small amount of the detail.

At Moneyworks, we use the local Mindful Money to provide our negative screening, based on their research and human analysis.  We then overlay a 65 question report for each fund manager, and work to understand how our fund managers make their decisions and where and why they are investing.  

When we have looked at the ESG ratings available to us through Morningstar (Sustainalytics) and Lonsec (Sustainable Platform), we have been confused about how the results are different to the actual information that we are seeing on certain funds and their holdings. At this stage of development of the ESG ratings industry, we see little value in this information, and would be hesitant to rely on this information.

Although the financial industry around the world is overloaded with regulation, we consider that this is a good move, and it would be good to see the consistency and quality of ESG research increase (although it might take time and nothing substitutes for good old human analysis and research).




 

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