ESG Ratings Are Crucial for Private Investors’ Decision-making, Study Shows

According to a recent study by the Ontario Securities Commission (OSC), ESG ratings are one of the most important features influencing investors’ preferences when selecting mutual funds, after a fund’s past performance.

The report comes at a time when environmental, social and governance (ESG) factors are becoming increasingly popular among retail investors. However, the document also highlights the challenges retail investors face in assessing the ESG components of investment funds.

Blurred definitions of ESG ratings pose challenges for private investors

When assessing the ESG component of mutual funds, investors have faced the challenge of there being no standardized definitions and measurements of ESG factors and differences in rating and ranking variables.

Nevertheless, the strength and format of ESG ratings (letter rating and number of stars) had a major impact on retail investors’ decisions.

According to the OSC announcement, the most important results of the experiment included:

The ESG rating proved to be one of the most important features influencing consumers’ purchasing decisions – right after a fund’s past performance.
Funds with star ratings had a more positive influence on fund selection than funds with letter ratings.

The absence of an ESG rating was preferred over some ESG ratings, suggesting that there is a threshold at which ESG ratings change from a motivating factor to a deterring factor.
Two investor segments were identified: those who are value-oriented and those who are financially oriented.

“The OSC is concerned about this lack of transparency and clarity in ESG ratings”

Leslie Byberg, Executive Vice President, Strategic Regulation at the OSC, said: “ESG factors continue to have a significant impact on financial decisions, although it is difficult for investors to evaluate the various factors that contribute to ratings and rankings. The OSC is concerned about this lack of transparency, and clarity on ESG ratings will help investors make more informed decisions.”

The research suggests that standardization of ESG ratings and greater transparency will help investors evaluate these investments more effectively.

By educating retail investors about ESG investing, they can differentiate between risks and potential impacts and identify signs of greenwashing. In addition, training financial advisors in ESG will improve their ability to serve clients.

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(Featured image by Tumisu via Pixabay)

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