More than half of top 50 asset managers developing internal ESG ratings

The world’s biggest asset managers are ‘increasingly looking to develop their own proprietary ESG ratings and tools to lessen their dependence on ratings firms’, according to new research from SquareWell Partners.

The firm’s annual study of the 50 largest asset managers globally – which this year have close to $60 tn in assets under management – looks at how these managers are approaching some of the biggest issues facing the financial markets. This year, the report looks at how asset managers approach ESG, corporate engagement and voting at general meetings.

SquareWell finds that 20 of these 50 asset managers use data from at least four different ESG ratings agencies, such as MSCI and Sustainalytics. At the same time, 30 have now developed their own, proprietary internal ratings system – findings that no doubt add to the pressure on companies to not only report on ever-increasing ESG metrics but also to fill out ratings agency questionnaires.

Paris Mudan, responsible investment analyst at SquareWell, says that ‘in an ideal world, companies should monitor all the data/research on them but that is not realistic given the resources companies have.’

What companies and IR teams can do is ‘determine which ESG research and ratings providers their top investors are using and, where applicable, what data is used in the investor’s proprietary models,’ he tells IR Magazine. They can then take a ‘top-down approach and engage with ESG research and ratings providers that have a high investor subscription rate together with those that have a significant influence over the composition of ESG indexes.’

SquareWell’s report also looks at the different reporting frameworks supported by the big asset managers: 43 of the 50 support the TCFD framework and 27 support SASB’s reporting standards. Additionally, 36 are members of Climate Action 100+ while only nine are part of the Net Zero Asset Managers Initiative.

‘While the GRI has remained prevalent for multi-stakeholder sustainability reporting, investors have intensified the pressure on companies to adopt more targeted and material reporting frameworks such as those of the TCFD and SASB,’ Mudan says.

‘Fortunately, there is some overlap between existing reporting standards and frameworks. For instance, the reporting framework of CDP’s climate change report refers to TCFD recommendations, and the Stakeholder Capitalism Metrics released last year by the International Business Council of the World Economic Forum are principally drawn from existing standards such as the GRI, TCFD and SASB.’

As investor interest in ESG issues has grown, many companies have already aligned their reporting with these frameworks.

Estelle Guichard, partner and head of responsible investment research at SquareWell, tells IR Magazine that while most investors don’t expect full alignment ‘overnight’, there is growing pressure from large passive investors with ‘hard’ requests on TCFD. She says these investors plan to take voting action in the 2021 general meeting season if companies fail to report in accordance with their requests.

While it might be hard for companies to make big changes to their reporting frameworks quickly, Guichard says what they can do ‘in the short term’ is ‘map out their current disclosure to TCFD and SASB [standards] to identify additional information that needs to be disclosed, and add a reference index at the end of their sustainability or integrated report to allow readers to easily access key information.

‘This will meet investor expectations for 2021 and demonstrate that companies are taking an important first step.’