Rating agencies, advisors, and asset managers are set to play a greater role in the world of environmental, social, and governance (ESG) investing, according to the latest issue of The Cerulli Edge – Global Edition.
While Cerulli Associates, a global analytics firm, regards ESG ratings for funds as a creditable step toward improving the asset management industry’s ESG transparency and awareness, it also warns of the need for caution.
“Independent ratings will likely force managers to reveal more detail on the implementation of their ESG policies–those that fail to comply may suffer low ESG ratings, which may well result in outflows,” says Barbara Wall, Europe managing director at Cerulli. “However, these ratings may contain size or industry biases, therefore asset managers and asset owners should not unreservedly trust the accuracy or comparability of an ESG score.”
Cerulli expects that retail investors and private banks will be the main market for ESG funds ratings. “Although institutional investors are the primary drivers of demand for sustainable investment, they prefer mandates and bespoke solutions–thus generic ESG scores will be of little value to them,” says Wall.
Justina Deveikyte, a senior analyst at Cerulli, adds that rating agencies can produce very different ESG ratings for the same companies or funds. “It is therefore crucial that users understand the differences in the methodologies used by the agencies, and not blindly count on one ESG score,” she says.
Cerulli points out that a number of asset managers are launching sustainable funds across a broad range of asset classes, while ratings agencies are eyeing opportunities to provide ESG ratings for funds as well as for individual companies. “Rating agencies may well start partnering with data providers,” says Deveikyte, noting that Morningstar and MSCI recently introduced sustainability ratings for mutual funds and for ETFs.