With many investors’ time and attention pulled in so many directions, Paleja notes that there is a real propensity to latch onto one or two key factors. The trouble with ESG is that not all ratings are the same and not all ratings mean the same thing. Faced with that ambiguity an investor may prefer to ignore ESG criteria altogether. The study found, notably, that investors will prefer a fund with no rating to a fund with a low rating. Paleja says that this could be a product of negative views on greenwashing and a fear among some investors that an ESG rated fund, especially one with a low rating, has engaged in greenwashing.
The OSC study grouped investors into two broad cohorts: values-driven investors and financially-driven investors. Values-driven investors constituted 51 per cent of the respondents surveyed, financially-driven investors made up the other 49 per cent. Both groups participate in ESG investing, but they have different core goals. Values-driven investors want to affect some kind of change in the world, Paleja explains. Financially-driven investors appear more motivated by protection from potential risks. The latter group placed less of a focus on ESG factors while the former showed a willingness to pay more in management fees for a good ESG score.
One of the more interesting aspects of the survey was the fact that investors preferred star ratings for ESG scores to letter ratings. A fund with a “B” rating was far more likely to be considered bad than a four-star rating. While arbitrary, the preference for star ratings could fall in line with the way stars and letter grades are used in other contexts. A consumer might be happy with a four-star hotel, but a student might not be happy to get a B on their exam. Perhaps more importantly, the fact of a preference for the medium by which the same effective information is delivered further highlights the lack of clarity in this space.
While Paleja says that investors bear some responsibility in navigating the complexities of ESG, she highlights that other players can support them. That includes advisors and financial wellness professionals offering clearer explanations that pull from various independent sources. Greater financial literacy among ordinary investors and consumers can result in greater clarity here.
There is also a role for regulators. While securities regulators can’t set environmental or social policy, Paleja notes that the OSC’s role includes maintaining a consistent, comparable, and useful information suite that can support investors’ decision-making. She hopes that research like this can inform stakeholders in the financial services industry who will play a role in these educational efforts.
