ESG investing strategies, including ETFs, are capturing more assets and garnering more support among both professional and retail market participants. That’s the good news. However, headwinds to broader adoption linger, such as the simplicity of ESG ratings and scoring.
In other words, more simplicity and uniformity in ESG ratings systems needed. That much is revealed in the SustainAbility Institute by ERM Rate the Raters 2023 Report, which was published in March. Those necessities also highlight the allure of investment products such as the Calvert US Large-Cap Core Responsible Index ETF (CVLC).
CVLC follows the Calvert US Large-Cap Core Responsible Index, a relatively straightforward approach to the popular ESG/domestic large-cap equity combination. That simplicity is attractive at a time when the opacity of ESG ratings schemes increasingly frustrates money managers.
“Despite high usage, investors and corporates are also frustrated by the shortcomings of ESG ratings,” according to the ERM survey. “Black box ratings methodologies and questionable data accuracy are particular concerns.”
How To Boost “Modest” Confidence
The survey added that most investors describe their confidence in ESG ratings methodologies as just “modest.” ESG scoring firms and index providers have work to do in reducing murkiness. As such, CVLC’s direct approach to rankings could be well-timed.
“Investor demand for ESG ratings is strong and growing, with 57% of companies citing it as their top motivation for engaging with ESG raters. Our survey also shows that many investment teams are now required by their firms to incorporate ESG ratings and data in their investment decisions,” noted ERM.
More than half of survey respondents said consistency and comparability regarding ESG ratings are top priorities. That objective is even more important when accounting for the fact that many money managers must meet mandates to invest a portion of their assets in ESG strategies.
Moreover ,the percentage of professional investors classifying ESG ratings as “useful” declined year-over-year.
One of the clear messages sent by ERM survey respondents is that the time is now for evolution in ESG scoring. If that evolution doesn’t arrive in material fashion, it’s possible advisors and investors will gravitate toward products with elegantly simple approaches to ESG — a box checked by CVLC, despite being in its infancy.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.