Responsible investment: the ambiguous positioning of extra-financial rating agencies

Posted on Dec. 2020 at 11:20

Born in Europe, naturalized American. This has been the fate of most extra-financial rating agencies specializing in ESG (environment, social and governance) criteria in recent years. After the British Trucost bought by S & P Global, the French Vigeo Eiris, now a subsidiary of Moody’s, the Dutch Sustainalytics definitively passed into the bosom of Morningstar in 2020, based on a valuation of 170 million euros. As an exception to the rule, Deutsche Börse has just acquired ISS, the famous American agency providing advice to shareholders, which also has a rating team.

This control of financial information players over ESG agencies is easily explained. These provide risk management tools that have become essential in the investment profession. “These are the needs of investors that prompted us to launch our ESG relevance scores in early 2019.says Andrew Steel, Global Head of Sustainable Finance at Fitch Ratings. The idea is not to say which issuer is good or bad, but to define the impact of ESG risk factors on our credit rating decisions. “

Thus, the risk profile of a coal player will be judged differently depending on its location, in a country still needing this source of energy in the medium term or in another already in the process of eliminating it. At Fitch, ESG rating is not yet a full-fledged profession, but could become so. The interest: diversifying the clientele. In sustainable finance, it is most often the investor who pays, while the historical model of rating agencies is based on the need for issuers to have their credit quality assessed.

Methodological biases

Formed by successive acquisitions, the large agencies offer an ESG rating for issuers, as well as various related services: carbon footprint, controversy management, specific indices to back passive strategies, advisory services. At MSCI, for example, an army of 200 ESG analysts follows some 14,000 issuers (companies, states, etc.). Faced with this firepower, “A management company wishing to develop an ESG offer can choose to rely entirely on an agency’s rating or choose to make its own analyzes, explains Sonia Fasolo, ESG manager at Eleva Capital. We favor a third way: taking the data that interests us from the agencies – the rate of feminization of boards of directors, for example – in order to draw our own ESG analyzes and ratings. “

For its part, Trusteam Finance has so far chosen to do without the services of agencies. “The quality of their work is improving, recognizes Claire Berthier, manager at Trusteam Finance. But certain biases remain, such as the fact that they rely mainly on declarative data, which favors large companies, which are better equipped to respond. “ Another criticism often made to agencies: the lack of methodological transparency. “This results in a problem of consistency, continues Claire Berthier. A company’s ESG rating can vary drastically depending on the supplier. “ The list of companies in the coal sector published by Trucost is, for example, much more limited than that of the NGO Urgewald, forgetting in particular a few Chinese giants, recently underlined the NGO Reclaim Finance. In France, the Fédération Bancaire Française uses the first list, while the Autorité des marchés financiers (AMF) prefers the second.

In addition, obvious conflicts of interest may arise. “Some companies complain about the agencies’ lack of transparency on the rating assigned to them, says Sonia Fasolo. And when they ask for details, they are sometimes offered consulting services to improve themselves. “ Paid, of course. Worse, the rise of ESG favors the irruption of new very opportunistic entrants. “Regulatory complexity pushes some pharmacies to exorbitant offers, plague a manager. A consultant asked us for 5,000 euros to assist us in signing the Principles for Responsible Investment, i.e. two hours of work to complete a questionaire. Same price charged by an unknown label which claimed to certify that our funds did not invest in tobacco! “

Today, the added value lies in forward-looking approaches, which cross data or use artificial intelligence. “The AMF is fully aware of the need to raise the quality level of ESG and is working in this direction”, assures Stéphane Toullieux, president of Athymis Gestion.

A juicy market

$ 1.260 billion in assets managed in sustainable funds globally (Morningstar, as of September 30)

82.1% of sustainable funds are managed in Europe (Morningstar)

+ 79%, this is the increase in outstandings in 2020 of the 1,218 European funds with an SRI label (socially responsible investment) (Novethic)

527 funds have the French label (Label ISR)

151 environmental funds are available on the French market (Novethic)

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