Posted inESG

Ninety One: Industry is too reliant on ESG ratings

Few will be surprised that 88% of respondents attending FundForum are using ESG ratings to support investment processes, with 92% planning to increase their use of ESG ratings in the future.

However, Ninety One, which conducted the research, said that this supports its belief that the industry is too reliant on these ratings.

It said in a statement: “Ratings cannot provide a full view into how a company manages its externalities both positive and negative. Externalities such as a company’s impact on the environment (natural capital), interaction with the societies it operates in (social capital) and the potential of employees (human capital) will increasingly influence valuations. Without this understanding, investors are overlooking companies that are making the right sustainable choices.”

Ninety One said that the survey comprised responses from 130 fund management professionals, or 10% of attendees, including fund managers, intermediaries, asset owners, consultants, and those in the distribution and asset servicing industries.

The company has provided no further information on this to Expert Investor to detail regarding the size of companies or assets under management that these respondents represented, whether they worked at entirely separate companies, or which ESG ratings they were using. There was also no illumination as to how or when firms planned to increase their usage of these ratings.

However, the viewpoint that firms are too reliant on ESG ratings is echoed in a recent White Paper from the firm titled Sustainable Investing Needs to Evolve. Fast. That publication states asset managers need to invest in developing new skillsets, better analytical tools, and valuation methodologies that ‘can price the full spectrum of externalities’.

Authors Deirdre Cooper, co-head of thematic equity, along with Juliana Hansveden and Stephanie Niven, portfolio managers for multi-asset, wrote that there are a number of items on the ‘to-do list’.

The first was to consider a firm’s willingness or ability to change, particularly in emerging market companies whose ESG scores tend to be lower than those in the developed market.

The authors wrote: “Many in the West fail to appreciate that being a leader in sustainability can be a growth tailwind for these businesses, too. Surveys show that developing-world consumers also care about biodiversity and nature loss. The Chinese, in fact, are even more willing to buy electric vehicles than Germans. So the first item on the to-do list is to evolve today’s simplistic and backwardslooking sustainability assessments into more intelligent, contextualised appraisals.”

Secondly, investment firms are advised to adapt how they invest to reflect changes in the business world.

They wrote: “The traditional way of thinking about shareholder returns is that they are generated at the expense of other stakeholders. Today, we see evidence that consumers, society and markets are starting to reward companies that consider the impact they have on all stakeholders, and in so doing create value for all.”

Next up was new methods and methodologies. It is important for firms to not only collect relevant and granular data, said Ninety One, but to be able to interpret it correctly.

“You may be thinking that ESG data-providers collect information on all this stuff. They certainly collect myriad datapoints. But what does the percentage of women holding board seats or executive roles really tell you about a company’s future growth and profitability?” the authors questioned.

Its last point in Sustainable Investing Needs to Evolve. Fast was that firms should develop more sophisticated assessments.

They wrote: “[The] drivers of growth will only be unlocked if the company is run in a way that enables people from all walks of life to contribute and exert influence. Is the company a melting pot, or just a salad bowl? To answer this, the analyst needs to appraise not only a company’s diversity, but its inclusiveness. This is a more complicated, qualitative assessment that requires in-depth, direct knowledge of a company.”

Pete Carvill

Pete Carvill is a reporter, writer, and editor based in Berlin who has been writing for the B2B and mainstream media since 2007. He is a contributing writer for Expert Investor and, in addition, has...

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