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Refinitiv to remove ‘subjectivity’ from sustainable fund rating

Refinitiv will seek to strip out ‘subjective components’ with its planned sustainable fund rating, which is expected to hit the market by end of Q2 2020.

Robert Jenkins, global head of Lipper research at Refinitiv, told Expert Investor: “A key differentiator for our sustainability fund ratings is that it intends to score companies, and thus funds, based on purely objective criteria – as opposed to subjective-based filters or assumption-driven metrics.”

He further explained that the approach seeks to provide transparency and auditability.

“Current ratings tend to have subjective components embedded in their scoring and materiality constructs which cloud the user’s ability to easily understand the underlying models and to audit back to the original data driving the scores,” he said.

The news comes as the market for environmental, social and governance (ESG) data and rating providers is heating up.

In regard to ESG fund ratings, Refinitiv will join offers from MSCI and Morningstar.

In March 2019, the company appointed Leon Saunders Calvert as head of sustainable investing & fund ratings, with his newly created role combining Refinitiv’s ESG data and Lipper’s fund ratings businesses.

Limits of ESG ratings

The lack of a standard definition on ESG has led to different approaches in sustainability ratings.

Depending on the chosen metric and its weight; evaluations of companies can vary, creating confusion among investors.

A company with sustainable products like Tesla, for example, could rank higher when viewed through an environmental lens but lower when viewed based on corporate governance criteria.

Jeroen Bos, head of specialised equity & responsible investing at NN Investment Partners (NN IP), recently commented: “ESG ratings are opinions, not facts, so it is crucial to understand the viewpoints behind them”, cautioning investors that pitfalls remain.

One of them is the low correlation between ESG rating agencies, the Dutch asset manager said, which illustrates the subjective nature of ESG scores, partly due to the different methodologies.

To overcome these pitfalls, NN IP suggests, for example, focusing on material ESG aspects – ie, aspects with an impact on a company’s long-term ability to generate cash flow and hence its long-term share price.

The planned sustainable fund rating by Refinitiv aims to tackle this problem.

Jenkins explained: “Scores will be derived from Refinitiv’s proprietary ESG company scoring methodology that seeks to focus on an objective and transparent assessment of disclosed company ESG data.

“The approach will enable companies’ disclosed data to drive the scoring while avoiding subjective modifiers. More disclosures around common metrics in a given industry will lead to increased confidence in the data.

“The methodology will be similar to the Lipper Leader fund ratings framework and will be based on a 1-5 scale (with five being the highest). It will represent an asset weighted roll-up of underlying company-level ESG scores.”

Corporate data

Refinitiv is a member of the EU’s Technical Expert Group on Sustainable Finance. Its newly devised taxonomy aims to avert greenwashing and is part of a wider plan to increase sustainable finance flows.

According to the taxonomy, companies are ‘green’ if they are able to meet certain thresholds on environmentally sustainable activities, a metric which can be expressed in company revenues.

Jenkins said: “Refinitiv is prepared to capture revenues from green operations – which is the primary issue in the EU’s sustainable finance taxonomy.

“As the regulation takes hold, we expect companies to begin incorporating the required reporting into their disclosure practices over the course of the year, which will further enable us to track their compliance.”

Refinitiv’s sustainability data covers over 7,000 companies across 400 metrics and its Lipper database holds details on over 380,000 global mutual funds, it said.

The London Stock Exchange Group is expected to complete the acquisition of Refinitiv for a value of $27bn (€24.8bn) during the second half of 2020.

Elena Johansson

Senior Reporter

Part of the Bonhill Group.