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Most advisers and wealth managers think ESG raters need to be more transparent about their methodology, with research finding that less than a fifth trust ESG ratings.
In a survey from the Association of Investment Companies (AIC), three-quarters of intermediaries (76 per cent) agreed that greater transparency is needed around how ESG raters score funds.
A majority of advisers and wealth managers (58 per cent) also thought that ESG ratings lack credibility because different providers can give the same fund very different scores; only 13 per cent disagreed with this view.
In contrast, the data also found that a quarter (24 per cent) were of the view that ESG ratings help to alleviate concerns around greenwashing. But more than four in 10 (44 per cent) disagreed with this statement.
And almost half (47 per cent) do not trust ESG ratings when researching investment funds, while one in five intermediaries (19 per cent) said they do.
AIC research director Nick Britton said the survey showed that advisers and wealth managers remain “deeply sceptical” about sustainability claims from funds, even as they expect growing demand for such strategies.
Given the diversity of ESG investment approaches, a single ESG rating or score will likely struggle to capture this nuance.Jim Whittington, Dimensional Fund AdvisorsJim Whittington, head of responsible investment at Dimensional Fund Advisors, highlighted how each ratings agency may have its own methodology. “Adding to this, the topics considered are very subjective,” he said.
“There is no single right way to manage and evaluate ESG funds. A lot depends on the objective and strategy pursued by the fund manager.
“One ESG fund may exclude certain stocks that a manager considers controversial, while another may hold them because they seek to influence change through stewardship. Given the diversity of ESG investment approaches, a single ESG rating or score will likely struggle to capture this nuance.
“We see no shortcuts to understanding whether the ESG approach of a given fund is a good match for the ESG values and goals of a specific client. The solution for financial professionals is to do their homework to ensure the fund’s and the client’s ESG and investment objectives are aligned.”
In July an industry group convened under orders of the FCA published a provisional, voluntary code of conduct for ESG ratings and data product providers.
The ESG Data and Ratings Code of Conduct Working Group launched a now-closed consultation on the code, in a bid to enable confidence in the integrity of ESG ratings and data products.
Chloe Cheung is a senior features writer at FT Adviser
