OSC identifies need for standardized ESG ratings to help retail investors make informed fund choices
The Ontario Securities Commission (OSC) has released findings from a study assessing how environmental, social, and governance (ESG) factors affect retail investor decisions.
According to the experiment, ESG ratings are a major influence on fund selection among retail investors, ranking second only to a fund's past performance.
The format of ESG ratings—such as letter grades or star ratings—also strongly impacts investor preferences.
The report, titled ‘A Behavioural Insights Analysis of the Effects of Environmental, Social, and Governance Factor (ESG) Disclosure and Advertising on Retail Investors,’ highlights the challenges faced by retail investors in evaluating the ESG attributes of investment funds.
These challenges stem primarily from the lack of standardized ESG definitions, variable measurements, and discrepancies in rating and ranking systems.
Key findings from the study include the significant influence of ESG ratings on consumer choice, only surpassed by a fund’s past performance. Investors showed a stronger preference for funds with star ratings over those with letter grades.
Interestingly, some investors preferred funds without ESG ratings over those with specific ratings, suggesting that ESG ratings can sometimes serve as a deterrent rather than an incentive.
The OSC identified two main investor segments: values-driven investors and financially driven investors.
Leslie Byberg, executive vice president of Strategic Regulation at the OSC, noted, “ESG factors continue to have a significant influence on financial decision making, despite the difficulties investors have assessing the different factors that contribute to ratings and rankings.”
Byberg also pointed out the OSC’s concern over transparency, asserting that clearer ESG ratings would enable investors to make more informed choices.
The OSC’s research proposes that standardizing ESG ratings and enhancing transparency could aid investors in evaluating ESG investments more effectively.
Education initiatives to increase retail investors' understanding of ESG investing would also help them distinguish between associated risks and the social or environmental impacts of their investments.
Enhanced training for financial advisors on ESG topics would support advisors in providing clients with informed guidance.
