The reliance of pension plans on ESG rating agencies is expected to increase

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Almost a third (30%) of global pension plans and institutional investors expect their use of environmental, social and governance (ESG) rating agencies to increase ‘significantly’ over the next three years, according to a study by SigTech.

In addition, 38% of those surveyed believed that their use of ESG rating agencies would increase “slightly”.

However, two-thirds (66%) of professional investors surveyed said they struggle with ESG rating agencies because they can provide “wildly divergent” ESG scores at the company level.

“Many investors struggle with ESG rating agencies which often assign extremely divergent ESG scores to companies,” commented Daniel Leveau, head of strategic initiatives for institutional investors at SigTech.

“The divergence is attributed to how rating agencies define and measure ESG performance.

“Many criteria are difficult to measure and assigning a score to a specific criterion is often not as precise as using data from a company’s financial statements. This ambiguity around ESG performance makes it difficult to form a universal standard for ESG ratings. “

SigTech’s research also found that 14% of pension plans and institutional investors expected a dramatic increase in investor activism over the next three years, while 52% expected a slight increase.

Leveau continued, “Investing in a common investment vehicle instead of directly owning the individual securities makes it even more difficult for an investor to become an active owner.

“A common investment vehicle gives the investor only indirect ownership of a security; investors do not have the right to vote at a company’s annual meeting and it is more difficult to actively engage with these companies to effect change.

“Lately, large institutional investors have come under increasing criticism for being anonymous owners and not taking full responsibility for their investments.

“Instead, investors would be better off tailoring their equity investments according to the desired exposure to risk factors and integrating their unique ESG policy. One-size-fits-all products are not the answer, investors need to embrace personalization and direct title ownership. “

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