Pension schemes' use of ESG rating agencies set to rise

Almost a third (30 per cent) of global pension schemes and institutional investors expect their use of environmental, social and governance (ESG) rating agencies to increase ‘dramatically’ over the next three years, research from SigTech has found.

A further 38 per cent of respondents believed that their use of ESG rating agencies would rise ‘slightly’.

However, two-thirds (66 per cent) of professional investors surveyed stated that they struggle with ESG rating agencies as they can provide “wildly divergent” ESG scores at a company level.

“Many investors struggle with ESG rating agencies which often assign wildly divergent ESG scores to companies,” commented SigTech head of strategic initiatives for institutional investors, Daniel Leveau.

“The divergence is attributed to how the rating agencies define and measure ESG performance.

“Many of the criteria are hard to measure and assigning a rating for a specific criterion is often not as precise as using input from a firm's financial statement. This ambiguity around ESG performance makes it hard to form a universal standard for ESG ratings.”

SigTech’s research also found that 14 per cent of pension schemes and institutional investors expected investor activism to increase dramatically over the next three years, while 52 per cent predicted a slight rise.

Leveau continued: “Investing in a pooled investment vehicle as opposed to owning the individual securities directly makes it even more difficult for an investor to become an active owner.

“A pooled investment vehicle only gives the investor indirect ownership of a security; investors don’t have the right to vote at a company’s annual meeting and it is more difficult to actively engage with these companies to constitute change.

“Lately, large institutional investors have increasingly come under fire for being anonymous owners and not taking full responsibility over their investments.

“Instead, investors would be better off tailoring equity investments according to their desired risk factor exposure and incorporating their unique ESG policy. ‘One-size-fits-all’ products are not the solution, investors need to embrace customisation and direct ownership of securities.”

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