Need for ESG Uniformity Increasingly Apparent | ETF Trends

While environmental, social, and governance (ESG) investing gains more momentum with a broader swath of advisors and market participants, at least one thing is becoming abundantly clear: The need for more uniformity in ESG ratings and scoring is accelerating.

That movement is gaining incremental momentum and it highlights the utility of straight-forward approaches to ESG investing that prioritize credibility over clarion calls. Some exchange traded funds check those boxes, including the Invesco ESG Nasdaq 100 ETF (QQMG) and the Invesco ESG NASDAQ Next Gen 100 ETF (QQJG).

A report published Monday by the International Federation of Accountants (IFAC) confirms that while more companies are discussing environmental, social, and governmental investing, differences in reporting methodologies are increasingly apparent.

“For the third consecutive year, our analysis indicates that while the frequency of reporting ESG information is very high and the incidence of assurance is on an upward trend, there continues to be a meaningful difference between reporting and assurance rates,” according to the group.

The IFAC survey indicates 95% of corporations are divulging some form of sustainability data, but just under two-thirds provide accompanying assurances. That discrepancy could underscore the importance of comprehensive approaches offered by products such as QQMG and QQJG. The indexes tracked by these ETFs set ESG standards. Companies either meet those standards or they don’t, meaning greenwashing and ESG “fudging” are limited.

Those are important traits because the quality of ESG ratings is more important than ever before and scrutiny to that effect is intensifying.

“As the drive toward a global system for sustainability-related reporting continues, investors, regulators and policymakers are turning their attention to the important role of assurance in ensuring high-quality reporting. With the growing importance of—and reliance on—sustainability information, low-quality assurance is an emerging investor protection and financial stability risk,” added the IFAC.

Moving forward, owing to favorable fees and the aforementioned index structures, QQMG and QQJG could be all the more appealing to long-term ESG investors because the funds address some of the ratings issues confounding ESG asset allocation today.

“Even as we see companies increasingly report on ESG and sustainability, the data we’re tracking reveals continuing fragmentation around the world in terms of which standards and frameworks are used,” said IFAC CEO Kevin Dancey in a statement. “Eighty-six percent of companies use multiple standards and frameworks. This patchwork system does not support consistent, comparable, and reliable reporting. Importantly, it also does not provide the necessary foundation for globally consistent, high-quality sustainability assurance.”

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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.