Investors flag concerns over company data, call for ESG ratings comparability.
Low transparency and a lack of comparable indicators in ESG rating methodologies are among several data-related barriers to the growth of ESG investing, according to the Organisation for Economic Cooperation and Development’s (OECD) Business and Finance Outlook 2020.
In practice, this means that a company might receive a high ESG score from one service provider, and a much lower score from another. This inconsistency has led to mass confusion among investors wanting to make clear ESG-focused investment decisions.
“The lack of standardised reporting practices and low transparency in ESG rating methodologies limit comparability and the integration of sustainability factors into the investment decision process. The link between ESG performance and financial materiality is also ill-defined, with little evidence of superior risk-adjusted returns of ESG investments over the past decade,” the report said.
To facilitate consistency in information for investors, close engagement between regulators and institutional investors “will be critical”, according to the report.
The OECD called for the development of a common set of global principles and guidelines designed to achieve consistent, comparable and verifiable ESG data to help market participants “to properly conduct due diligence, manage risks, measure outcomes, and align investments with sustainable, long-term value”.
“Market participants often lack the tools they need, such as consistent data, comparable metrics, and transparent methodologies, to properly inform value-based decision-making through a sustainability risk lens,” said Greg Medcraft, head of the OECD’s Directorate for Financial and Enterprise Affairs.
The report included a survey in which investors voiced concerns about the lack of qualitative information from companies about their ESG policies and performance. Institutional investors recommended the establishment of publicly-available datasets to compare different agencies’ ESG ratings scores. Doing this would likely reduce reporting burden on corporates, as well as boost investor confidence when incorporating ESG-focused decisions in their investments.
“Finance has a critical role to play in ensuring a truly sustainable recovery from the COVID-19 crisis that will create better and greener jobs, boost income and lead to more sustainable and resilient growth,” said OECD Secretary-General, Angela Gurria. “But finance can only deliver better ESG outcomes if investors have the tools of information they need.”