SEC chair warns of risks tied to ESG ratings

29 May, 2020 06:41
source: Singularity Financial

Singularity Financial Hong Kong May 28, 2020 – by David Lee

Jay Clayton, chairman of the Securities and Exchange Commission, has criticised the industry’s reliance on a single rating for ESG funds data, describing this method as ‘imprecise.’ According to the FT, the SEC is concerned that, with the increasing popularity of sustainable, or ESG, investing, overly simply ratings systems are leading to misinformed or even misguided investment decisions.

“I have not seen circumstances where combining an analysis of E, S and G together, across a broad range of companies, for example with a ‘rating’ or ‘score’, particularly a single rating or score, would facilitate meaningful investment analysis that was not significantly over-inclusive and imprecise,” said Mr Clayton.

The SEC has reportedly been asking for feedback from asset managers about ESG ratings, amid rising concerns of greenwashing. Earlier March, the SEC Commission requested public comment on a requirement to prevent providers of financial products from duping customers into buying funds that don’t live up to their billing.

Jon Hale, global head of sustainability research at Morningstar, told the FT: “Funds labelled as ESG could disappoint investors, not because of investment returns but because they fall short on demonstrating their social and environmental impacts.”

More than $20bn was invested into ESG or sustainable-linked funds in America alone in 2019. Since the start of 2020, the covid-19 pandemic has been widely seen as boosting ESG investing still further.