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Even determining whether a fund is “sustainable” depends on the criteria being used, and rating companies have different methods. The same goes for the company ratings used to create indexes that sustainable ETFs track.
Alicja Brown, investment advisor at Brown Investment Group of CIBC Wood Gundy in Edmonton, says there are “inherent differences in ratings” that can lead to companies receiving very different scores depending on who’s evaluating.
MSCI, the index provider for most Canada-based ESG ETFs, assesses companies on 37 key ESG issues and monitors controversies to arrive at an overall ESG letter score that’s adjusted relative to a company’s industry peers. Like credit ratings, the scores range from CCC (laggards) to AAA (leaders).
Morningstar-owned Sustainalytics produces an ESG risk score as well
as a percentile rank that’s based on companies’ total ESG score relative to industry peers (the top 1% score a 99, for example). The score accounts for
a company’s preparedness, disclosure and level of controversy across the three ESG themes.
According to the Investment Funds Institute of Can-
ada’s 2020 survey, more than six in 10 investors who don’t currently own respon- sible investments said they’re either “somewhat likely”
or “likely” to include such investments in their portfolio in the next couple of years.
More than three- quarters of those sur- veyed said they would like their advisor to inform them about responsible investing products; only about one-quarter said their advisor or financial institution had asked about their interest in such investments.
“Different rating agencies may have
separate data sources, independent
measurement processes and results,
alternate key issues, different treat-
ment of missing data, or conflicting
ways of looking at controversies,”
according to a National Bank Financial report from earlier this year analyzing ESG ETFs.
This can make for “eye-catching discrepancies” between prod- ucts, Straus says, or companies with relatively high ratings being included in some funds but excluded from others.
The National Bank report found ESG scores from MSCI and Sustainalytics rarely align for individual companies (though it’s rare that scores vary dramatically).
Straus points to the example of how four large-cap companies are treated differently in two major ETFs. BCE and Thomson Reu- ters are excluded from the BMO MSCI Canada ESG Leaders Index ETF because of a low rating for Bell on labour management, privacy and data security, and a low “human capital development” score for Thomson Reuters. Both companies are included in the iShares Jantzi Social Index ETF, which uses ESG scores from Sustainalytics.
The iShares fund excludes Enbridge and Bank of Nova Scotia, but those companies are included in the BMO ETF.
“It shouldn’t be surprising that in any index universe with 100 companies, there will be some [cases] where a company gets a higher rating in one and is fully excluded in another — either for some methodological quirk, like an exclusion based entirely off carbon impact, or for some other issue like labour practice or min- ority representation that may not even be considered in the other index,” Straus says, speaking in general terms.
Advisors, therefore, need to understand the nuances of how rating agencies develop their scores — the data process, how
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