A recent Funds Europe roundtable discussed the need for transparency among ratings providers and how education can help drive progress for owners and managers to curb greenwashing.
Stefano Montobbio, Global head of investment governance and ESG, EFG International
Neill Blanks, Research director, MainStreet Partners
Scott Foster, Head of digital and governance products, Caceis
Muhammad Masood, Director – sustainable investing, BlackRock
Funds Europe asked four industry ESG experts to discuss five issues at the heart of the topic: ESG ratings, transparency, greenwashing, voting and the development of ESG in different geographies.
Neill Blanks, research director at MainStreet Partners, began the roundtable discussion by addressing ESG ratings, an area where there is known to be difference between the ratings scores of individual providers – a facet of the system that is not helpful and can create confusion.
MainStreet Partners, and fund houses alike, have internal processes for rating companies against ESG criteria, but duplication of effort has caused confusion and presented discrepancies. There’s been debate over whether there should be greater consistency between different ESG ratings or whether it is a case of ‘the more the merrier’, provided investors genuinely understand those differences.
Blanks said: “There are a couple of aspects to this. Lately, we have heard calls for regulation on ESG ratings. Whether it’s regulation or more oversight, it’s certainly something on the cards, and I can see it happening sooner rather than later.”
Blanks highlighted that, as with financial ratings, there are various ways of looking at ESG and noted that he thought it was, therefore, acceptable to have different providers with varying methodologies for this.
“What it boils down to is the quality of the data that feeds the process. The quality of the output is only as good as the quality of the input. There is definitely a data problem in terms of quality, and everyone knows that.”
Blanks emphasised that different approaches were required for market competition. Muhammad Masood, director of sustainable investing at BlackRock, agreed, adding that transparency was what was most important here.
“This is relatively new…but there is some convergence in certain areas. If we look at defining ‘E’, there is more alignment happening in acknowledging, for instance, that renewables, cleantech, water management and waste management can be relevant pillars within an environmental category for many companies. The question then becomes: how exactly do you populate those buckets? What are the KPIs [key performance indicators] that you use? How do you weigh them? There are differences there, but the topics are becoming a bit more aligned.”
Companies increasingly looking to report on ESG will help drive consistency, according to Masood.
"I fear we will end up with reports where we will have lots of data across co2 emissions, energy consumption, etc, but the numbers will fail to provide intelligence..."
“Ratings companies use both publicly available reported information and estimations. We have generally found investors have more confidence in audited data reported from companies. If there are specific types of KPIs companies start to consistently report on, then that can help with consistency as well.”
Masood went on to explain that investors need to know the methodology going on in the background, and that transparency was, therefore, key.
“You need to be very clear on what you’re looking at. It’s kind of an education exercise for investors as well… you need to understand what’s going on in the background, lift the lid and have a look underneath.”
However, Stefano Montobbio, global head of investment governance and ESG at EFG International, pointed out the way data was interpreted and aggregated by different providers should not be overregulated. “Otherwise, I fear we will end up with reports where we will have lots of data across CO2 emissions, energy consumption etc, but the numbers will fail to provide intelligence because they omit information on momentum, trends and actions companies are taking to improve the data and their footprint.”
He agreed with Masood’s stance on transparency. “I would share the view that transparency around methodology should be shared, even if I do acknowledge there is often complexity in these methodologies. Understanding the differences and the different aspects of weighting and the data points considered is not easy to perform as an analysis.
“As such, transparency probably adds clarity only to the super-experts and not to the wider public. Training is another very important point, as, without it, data and information become almost useless.”