ASIC’s recent report on its interventions against greenwashing misconduct for the 2023–2024 period (REP 791) understates the need for improvement on ESG ratings, which often mislead consumers regarding the measurement of the sustainability of investment products.
ASIC said in its report that “our surveillance indicates there is ample room for improvement”.
Daniel Aguet, Deputy CEO and Index Director of Scientific Beta said “the report underlines the extent of greenwashing prevalent among investment managers and ASIC has proven itself as one of the most active watchdogs internationally. Nevertheless, the regulator’s work also has room for improvement, especially when it comes to the use of ESG ratings”.
“Sustainability-related information, like any other, should be accurate, based on reasonable grounds and be easily understood by investors,” said ASIC Commissioner Kate O’Rourke.
However, many investors use so-called ESG ratings, which bundle together many criteria, often qualitative, to create investment products and inform investors about their sustainability features. Qualitative research can be highly subjective, with conclusions relying primarily on researchers and their interpretation and analysis of the data.
“ESG ratings typically fail ASIC’s three information quality standards”, said Mr Aguet. “They are not accurate, not reasonably grounded and not understood by investors”.
ESG ratings diverge from one rating agency to the other, undermining their credibility as accurate and objective metrics.
The CEO of MSCI, the market leader for such ratings concedes as much in a recent interview with the Financial Times saying that “an ESG rating is an opinion … we are going to arrive at different opinions, we are going to arrive at a different rating”.
In a 2022 policy recommendation “to improve the transparency and credibility of ESG rating methodologies and promote market integrity”, the OECD “finds that despite progress, ESG approaches suffer from considerable shortcomings with respect to consistency, comparability and quality of data and transparency of associated methodologies that undermine their broader use and the trust of investors”.
Moreover, beyond being inaccurate, investors do not even understand what these ratings are intended to convey. According to a Bloomberg BusinessWeek article “[MSCI’s CEO] concedes ordinary investors piling into such funds have no idea that his ratings, and ESG overall, gauge the risk the world poses to a company, not the other way around. ’No, they for sure don’t understand that,’ he said in an interview last November. “I would even say many portfolio managers don’t totally grasp that’”.
In line with this admission, the OECD states that “greater clarity on the high-level purpose of elements in ESG ratings is warranted”.
“Until ESG ratings reasonably accurately measure what their providers intend them to measure, and until investors understand what these intentions are, ESG ratings are a source of investor misinformation,” Mr Aguet said.
For further reading on Scientific Beta’s position on ESG ratings, please download our white paper Can We Make ESG Scores Great Again?
Available at:
https://docs3.scientificbeta.com/Library/External/White_Papers/Can_We_Make_ESG_Scores_Great_Again
References:
Bloomberg BusinessWeek (10 December 2021). Simpson, Cam, Akshat Rathi and Saijel Kishan. The ESG Mirage. https://www.bloomberg.com/graphics/2021-what-is-esg-investing-msci-ratings-focus-on-corporate-bottom-line/.
FT (17 July 2024). Who killed the ESG party? https://www.ft.com/video/1eeebd90-25d4-4421-a175-deedcdbf9c18.
OECD (5 October 2022) Policy guidance on market practices to strengthen ESG investing and finance a climate transition, available at: https://www.oecd.org/en/publications/policy-guidance-on-market-practices-to-strengthen-esg-investing-and-finance-a-climate-transition_2c5b535c-en.html
About Scientific Beta
Scientific Beta is a global provider of advanced index solutions designed to help asset managers and institutions understand and invest in smart factor and ESG equity strategies. Established by a leading fundamental and applied investment research institution, the EDHEC-Risk Institute, Scientific Beta incorporates an academic level of scientific rigor and veracity into its solutions. Scientific Beta is a subsidiary of the Singapore Exchange (SGX) and maintains its strong collaboration with EDHEC Business School, adhering to the principles of independent, empirically-based academic research.
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