Consistent ESG ratings a must as demand for related investments grows

OVER the past couple of years, sustainable investments - specifically the use of ESG metrics (environment, social, governance) to analyse and screen securities - have gathered force.

Based on research by the Global Sustainable Investment Alliance (GSIA), assets invested by ESG integration have grown by nearly 70 per cent between 2016 and 2018, from US$10 trillion to US$17.5 trillion in assets. ESG integration is defined by GSIA as the systematic and explicit inclusion of ESG factors into financial analysis. The US is the biggest investment market by far to use ESG integration, accounting for some US$11.6 trillion in assets. Some three quarters of the assets are managed on behalf of institutions, and the balance for individuals.

Not surprisingly, as more investors and institutions embrace ESG in financial analyses, a thriving ratings industry has sprung up, focusing on generating ESG research and scores. As their services flourished over the past decade, a wave of consolidation and mergers has also set in. For instance, in 2010, MSCI acquired RiskMetrics Group, which itself had previously acquired a number of firms, some specialising in ESG research. Morningstar took up a stake in Sustainalytics, a leading provider of ESG research and ratings in 2017. More recently, Moody's acquired a majority stake in Paris-based ESG ratings provider Vigeo Eiris.