Investors are losing faith in ESG ratings, according to new research from the ERM Sustainability Institute.
The institute, which is an arm of environmental consultancy ERM, surveyed more than 50 institutional investors, including asset owners, for its latest Rate the Raters report.
It found there had been a “sharp decline” in the perceived quality of ESG ratings, with the top-rated provider’s score dropping from 4.2 out of 5 in 2023 to 3.5 in 2026. MSCI was the only provider of 13 assessed to improve its score over the period, and it rose from seventh to first place in the rankings.
“Research interviews with investors highlighted MSCI’s speed in launching relevant new products into the market on key topics including climate, human rights and biodiversity, as well as its broader integration into portfolio workflows,” said ERM.
The survey found that, despite their waning faith, investors expect ESG ratings to remain relevant. Most hope they will focus more on material issues in the future, and on linking data with financial performance.
Aiste Brackley, the director of the ERM Sustainability Institute, said the results pointed to “a growing sophistication in how investors evaluate and use ESG information”, which has led to more scrutiny on ratings.
“As ESG considerations become more closely linked to fiduciary responsibilities, expectations for data quality and transparency continue to rise,” she added. “Tolerance for errors, inconsistencies, and data gaps is declining.”
To keep up with this trend, regulators are tightening their rules: the EU ESG Ratings Regulation, which seeks to improve the reliability and transparency of ESG ratings, has been in effect since July; and the Financial Conduct Authority will launch a regime by the end of this year, requiring ESG providers in the UK to get regulatory approval.
This week also saw the publication of a report on harmonising ESG data from the industry’s de facto business association.
The Future of Sustainable Data Alliance (FOSDA), whose members include Bloomberg, CDP, Clarity AI, EcoVadis, the London Stock Exchange Group, MSCI, S&P Global and Sustainalytics, said the international Sustainability Standards Board’s (ISSB) disclosure framework and the European Sustainability Reporting Standards (ESRS) would drive important information flows.
However, it added that, “despite high-level alignment and common core concepts, detailed differences create comparability challenges, especially as more jurisdictions adopt – and in some cases adapt – them”.
FOSDA suggested “a coordinated concordance exercise” would help to identify the differences between regimes, assess their significance and support harmonisation efforts.
