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10th November 2021

Pension schemes/institutional investor research: Investor activism and use of ESG ratings are set to rise
 
  • 66% of professional investors interviewed said that they struggle with ESG rating agencies because they can provide wildly divergent ESG scores at a company level 
  • SigTech says the growth of customised portfolios will lead to a rise in investor activism.
  • Over the next three years, 66% of institutional investors expect investor activism to increase 

Nearly one in three (30%) pension funds and institutional investors say their use of ESG rating agencies will increase dramatically over the next three years, and a further 38% believe it will increase slightly. This is according to new research from quant technologies provider SigTech, who surveyed institutional investors across North America, Europe and Asia that collectively have around $935 billion of assets under management (please see the attached press release).

However, the findings reveal that 66% of professional investors interviewed said they struggle with ESG rating agencies because they can provide wildly divergent ESG scores at a company level. 

Over the next three years, 14% of institutional investors surveyed by SigTech said they expect investor activism to increase dramatically, and a further 52% anticipate a slight rise. 

Daniel Leveau, who heads SigTech’s strategic initiatives for institutional investors, said: “Many investors struggle with ESG rating agencies which often assign wildly divergent ESG scores to companies. The divergence is attributed to how the rating agencies define and measure ESG performance. Many of the criteria are hard to measure and assigning a rating for a specific criterion is often not as precise as using input from a firm's financial statement. This ambiguity around ESG performance makes it hard to form a universal standard for ESG ratings.”

"Investing in a pooled investment vehicle as opposed to owning the individual securities directly makes it even more difficult for an investor to become an active owner. A pooled investment vehicle only gives the investor indirect ownership of a security; investors don’t have the right to vote at a company’s annual meeting and it is more difficult to actively engage with these companies to constitute change. Lately, large institutional investors have increasingly come under fire for being anonymous owners and not taking full responsibility over their investments. 

“Instead, Investors would be better off tailoring equity investments according to their desired risk factor exposure and incorporating their unique ESG policy. “One-size-fits-all” products are not the solution, investors need to embrace customisation and direct ownership of securities.”

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