Environmental, social, and governance (ESG) investing strategies, including exchange traded funds, are capturing more assets and garnering more support among both professional and retail market participants. That’s the good news.
However, headwinds to broader adoption linger. Those include debate surrounding ESG ratings and scoring. In other words, more simplicity and uniformity is needed. That much is revealed in the SustainAbility Institute by ERM Rate the Raters 2023 Report, which was published in March. Those necessities also highlight the allure of investment products such as the Calvert US Large-Cap Core Responsible Index ETF (CVLC ).
CVLC follows the Calvert US Large-Cap Core Responsible Index — a benchmark that’s a relatively straight forward approach to the popular ESG/domestic large-cap equity combination. That simplicity is attractive at a time when more money managers are frustrated by opaque ESG ratings schemes.
“Despite high usage, investors and corporates are also frustrated by the shortcomings of ESG ratings,” according to the ERM survey. “Black box ratings methodologies and questionable data accuracy are particular concerns.”
The survey added that most investors describe their confidence in ESG ratings methodologies as just “modest.” That implies there’s work to be done by ESG scoring firms and index providers when it comes to reducing murkiness. CVLC could help with that endeavor, indicating that its arrival on the ESG ETF scene could be well-timed.
“Investor demand for ESG ratings is strong and growing, with 57% of companies citing it as their top motivation for engaging with ESG raters. Our survey also shows that many investment teams are now required by their firms to incorporate ESG ratings and data in their investment decisions,” noted ERM.
CVLC’s pertinence could increase when considering that more than half of respondents to the survey said consistency and comparability regarding ESG ratings are top priorities. That objective is even more important when accounting for the fact that many money managers are being told by parent companies that at least a portion of the assets they manage must be direct to ESG strategies. Added to that, the percentage of professional investors classifying ESG ratings as “useful” declined year-over-year.
One of the clear messages sent by ERM survey respondents is that the time is now for evolution in ESG scoring and if that evolution doesn’t arrive in material fashion, it’s possible advisors and investors will gravitate toward products with elegantly simple approaches to ESG — a box checked by CVLC, despite being in its infancy.
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