Georgina Laird, sustainable investment analyst at Kames, said the ratings risk being misunderstood by investors depending on them for evidence of a fund’s ESG ranking.
Investors should take it upon themselves to analyse the quality of individual funds and not rely solely on the recently launched ratings issued by agencies.
Laird said: “While the ratings agencies take a similar approach to one another in quantifying sustainability, they can arrive at very different conclusions for the same companies.
“Recognising that different approaches can result in different conclusions is vital for investors to understand before relying on the ratings as evidence of how sustainable a company or fund is.
“As we understand it, the various rating methodologies have already been amended numerous times. We hope that a number of additional points will be considered, and that they will be of use to investors seeking to incorporate ESG into their process.”
Among the limitations of the sustainability ratings is a focus on only operational aspects of companies which can give strong credentials to firms selling products such as tobacco and weapons which have a negative impact on society.
The ratings also often compare funds against a larger peer group which can mean niche products that may not score as highly are overlooked.
Market cap and geography can also skew results with larger companies able to pay to improve the publication of its ESG work, and European companies far more ESG aware than their US counterparts.
“We believe the ratings agencies should consider the qualitative aspects of an integrated sustainability process into their methodology. Sustainability is not, and cannot be, just another dataset,” Laird added.
