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Rating the ESG raters: why sustainable investing needs more independent verifiers

(Credit: Seagul/Pixabay)

The past year has been a heyday for sustainable investing. In the first quarter of 2020 alone, demand for environment, social and governance (ESG) funds hit a new record high, with sustainable fund assets under management reaching €120 trillion. 

For investors, this growing interest is not just about making the right decision for the environment or society but also the need to identify the financial risks – from climate change impacts to labour malpractices – that could threaten a company’s future performance or reputation. The unprecedented shareholder revolts that took place at some of the world’s leading oil majors last week were a clear signal that investors want companies to take those risks seriously.

The growth in sustainable investing has also created a huge demand for services from data providers, ratings and indices that assess how well companies are addressing ESG concerns. According to advisory firm ERM’s Rate the Raters Report 2020, the number of ESG ratings and rankings topped 600 in 2018 – and they have continued to grow as investors increasingly rely on these reports to inform their decisions.

More traditional investment data providers as well as credit rating agencies have also entered the marketplace, driving consolidation, with recent acquisitions including S&P Global’s takeover of RobecoSAM’s ESG business and Moody’s buying a majority stake in European ESG ratings firm Vigeo Eiris.

However the explosion of these data providers vying for attention has also added a new layer of complexity for insurers, pensions, family offices and other investors looking to improve the long-term sustainability of their portfolios.  The challenge becomes which provider to choose from and how to accurately assess a company’s environmental and social impact, particularly given that ESG remains a rapidly evolving concept, with reporting standards and frameworks still in their early stages. 

With different definitions of ESG performance come different approaches to measuring that performance and conflicting opinions. Ratings providers can vary widely in their assessments of companies and what they include in their scope. Their scores are generally calculated by gathering publicly available data such as company reports, research from non-governmental organisations, or by taking a more hands-on approach and requesting information from companies.  

Some might measure the same attribute but in different ways, or assign varying degrees of importance, for example, valuing human rights practices.  Others may include more data on a given sector or geographic region. Then there’s the concern over whether ESG performance can ever be distilled into a single score. This smorgasbord of ratings and methodologies, which is still largely unregulated, often leads investors to draw on multiple sources to help fill the gaps, with a majority of investors cited in ERM’s report saying they rely on more than one rating to inform their research. 

Enter the independent verifiers. With an array of data providers and indices to choose from, third-party ESG verifiers have stepped into the market to help screen information available and offer some clarity. In Switzerland, one such company is Geneva-based sustainable investment advisory firm Conser.  Founded by Angela de Wolff (also one of the co-founders of Sustainable Finance Geneva), the firm has developed its own proprietary methodology to capture a variety of different ESG opinions. 

“Because we’re supporting pension funds and asset owners in finding their way in this huge universe of sustainable funds we start by saying: what are you looking for?” says de Wolff.  

“We try to be agnostic and give transparency on all investment solutions and through this transparency we look to see if it fits with the sensitivity and the needs of the asset owners.”

The tool, ESG Consensus®, is built on multiple independent and recognised sources as well as active ESG funds – the aim being to offer a neutral perspective and the capacity for investors to compare.  It’s not about labelling what’s good or bad, she adds, but to “try to give the most transparency about what sustainable funds are offering as solutions.” 

Building trust between asset owners and asset managers. 

While everyone splurges on climate-friendly funds and competition increasing,  asset managers are also working harder to market their sustainable investment credentials. But for asset owners differentiating between those talking up their credentials – or greenwashing – and the genuinely sustainable products poses difficulties, even as the European Union continues to turn the screws on asset managers with its new green legislation. 

“Today you have asset managers auto declaring saying their fund is most impactful. And you have asset owners lost amid these different offers,” says Jean Laville, an associate at Conser. “Imagine an investor that has to select between 50 funds. How can they do it in a similar way?”

He says their aim is to “build trust” between asset owners and asset managers. “This is why we have developed our ESG meta-analysis, based on aggregation of multiple ESG expertise;  we also measure the dispersion of the opinions. The logic is to capture the market perception and translate it as a neutral assessment and verification tool.  It is a powerful instrument to verify the consistency between self-declaration and the actual portfolio composition.”  

Swiss Sustainable Fund Awards 

Conser has also partnered with the organisers of the Swiss Sustainable Fund Awards, which were launched three years ago, and recognise the best actors in sustainable asset management with the aim of creating more transparency. The winners of the eight categories, announced last week, were selected by a jury using Conser’s analysis, which assessed the underlyings of all eligible funds, together with financial performance data provided by consulting firm Anglo-Swiss Advisors. Winners included Janus Henderson for the Global Sustainable Equity Fund, in the global equities category. 

Speaking at the awards, Adrian Schatzmann, head of industry body, Asset Management Association Switzerland said greenwashing remained a real threat if ESG investing is to be taken seriously. 

“We have heard from many market participants, asset managers but first and foremost customers and private institutional investors, that there is sometimes confusion and misunderstanding with respect to ESG related terminology,” he said.

“Whether this is perceived or real, [greenwashing] is a topic that we have to be very aware of. If we don't, it can lead to an erosion of investors’ trust in our industry... So, as an industry we have to take that issue seriously and we need to tackle that in a proactive manner.”

This article was published in collaboration with Sustainable Finance Geneva.