One in three pension funds think use of ESG rating agencies will increase – SigTech

Almost one in three (30 per cent) of pension funds and institutional investors believe their use of environmental, social and governance (ESG) rating agencies will increase ‘dramatically’ over the next three years, new research has found.

The research by SigTech found that a further 38 per cent believe the use of ESG rating agencies will increase ‘slightly’ over the same period. The survey of institutional investors across North America, Europe and Asia have a total of USD 935bn assets under management in total.

However, the findings reveal that 66 per cent of professional investors interviewed said they struggle with ESG rating agencies because they can provide wildly divergent ESG scores at a company level. Over the next three years, 14 per cent of institutional investors surveyed by SigTech said they expect investor activism to increase dramatically, and a further 52 per cent anticipate a slight rise.

Commenting, SigTech head of strategic initiatives for institutional investors, Daniel Leveau, said: “Many investors struggle with ESG rating agencies which often assign wildly divergent ESG scores to companies. The divergence is attributed to how the rating agencies define and measure ESG performance. Many of the criteria are hard to measure and assigning a rating for a specific criterion is often not as precise as using input from a firm's financial statement. This ambiguity around ESG performance makes it hard to form a universal standard for ESG ratings.”

Leveau belives that investing in a pooled investment vehicle rather than owning the individual securities directly makes it even more difficult for an investor to become an active owner.

“A pooled investment vehicle only gives the investor indirect ownership of a security; investors don’t have the right to vote at a company’s annual meeting and it is more difficult to actively engage with these companies to constitute change. Lately, large institutional investors have increasingly come under fire for being anonymous owners and not taking full responsibility over their investments.”

Instead, he thinks investors should tailor equity investments according to their desired risk factor exposure and incorporating their unique ESG policy. “One-size-fits-all products are not the solution, investors need to embrace customisation and direct ownership of securities,” he concluded.

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