MSCI ESG downgrades means onus on firms to ‘control evaluation’

Methodology changes will see ratings of almost two-thirds of European ETFs lowered or removed


Natasha Turner

Relying on ESG ratings has been called into question by commentators in light of the news that MSCI will be downgrading many ESG funds.

Last week the Financial Times revealed that, according to a client note from BlackRock’s iShares arm, the number of European ETFs with a AAA ESG rating from MSCI is set to fall from 1,120 to just 54, while the number with no rating will surge from 24 to 462.

MSCI’s methodology changes, which are due to be implemented in Q2 and apply to all global mutual funds and ETFs, include removing the adjusted factor from ESG fund rating calculations and lowering the coverage requirement for fixed income funds from 65% to 50%. It will also exclude swap-based funds.

In a statement, MSCI said removing the adjustment factor would mean a fund’s ESG ratings would be “based solely on the ESG scores of its underlying holdings”, while the decision to exclude swap-based funds comes as it “actively explores” methods to provide a rating for swap-based ETFs based on the underlying index.

The changes come as pressure to regulate ESG ratings agencies increases. In November last year UK regulator the Financial Conduct Authority (FCA) set up a working group to write a voluntary code of conduct for ESG data and ratings providers. Similarly, last summer Japan released a draft code of conduct for ESG data providers, which it said should improve the quality of data.

“The [UK] government should give the FCA the power to regulate ratings providers as swiftly as possible,” said Mick McAteer, co-director of the Financial Inclusion Centre and former FCA board member.

See also: – Variability in ESG ratings makes a murky picture for investors

Commenting on MSCI’s decision, Yann Bloch, vice-president of product management Americas at NeoXam, said it further enforced the fact the onus is on financial institutions “to take control of the evaluations process themselves, until the ratings space is more advanced”.

“Firms have to empower the ESG specialists, investment teams, and reporting teams, by providing them with real, quality and transparent data.”

Volker Lainer, vice-president of product management and regulatory affairs at GoldenSource, added “a ‘one-size-fits-all’ methodology for ratings and data may not be the best solution. Diverse methodologies and information help firms better scrutinize the data that they have available as, if you put too much emphasis on a single paradigm or metric, you could open up the system to misuse.

“The more it becomes reference data, the more people realise that this core ESG data needs to be looked at in conjunction with adjacent datasets for better investment decision-making.”


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