The Financial Times reports that environmental, social and governance (ESG) investing is on the verge of a major transformation, as index provider MSCI is poised to remove ESG ratings from hundreds of funds. This change is part of a major overhaul of MSCI’s rating methodology.
According to unpublished research from BlackRock Inc.’s iShares unit, cited by the FT, MSCI intends to downgrade the ESG rating of hundreds of funds. The adjustments, scheduled to be implemented at the end of April, will apply to all investment funds and listed on the stock exchange in the world.
Index providers are pushing for changes to tighten requirements for what qualifies as an ESG-compliant fund amid pressure from regulators concerned about “greenwashing”.
One of the most prominent greenwashing scandals has been Deutsche Bank AG and its asset management group, DWS Group, in Frankfurt, Germany, which exaggerated green investments in ESG products.
The decline in funds with the best ESG ratings means that ESG-focused investors will face limited investment options, which could increase the price of assets with a sustainable label.
Under MSCI’s changes, all “synthetic” ETFs that use swaps to track asset value will lose their ESG rating, even if funds that own the identical underlying assets have a high rating.
Also, most “physical” funds, which directly hold stock or bond portfolios, are likely to be downgraded.
The changes, which come into effect at the end of April, will apply to all ETFs and mutual funds globally. -FT
MSCI did not provide details on the extent of the downgrades, but said these changes “will lead to fewer funds being rated AAA or AA and reduce the volatility of ESG fund ratings, which are results that our base of customers supported widely.”
The unpublished research reveals that 1,476 European ETFs will have their ESG rating reduced, 905 will remain unchanged and 78 will receive a rating increase. A staggering 446 funds, including more than 400 derivative-based funds, will lose their rating entirely.
Perhaps the ESG hype cycle is well past its peak…
… and all along, Elon Musk was right.
ESG is an outrageous scam!
Shame on you @SPGlobal
— Elon Musk (@elonmusk) May 18, 2022
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