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RI Europe 2016 warm-up blog: The great debate: ranking and rating funds and managers

The chair for RI Europe’s Great Debate outlines the motion.

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The ranking and rating of funds and managers on sustainability and corporate governance is at an early stage in its development and needs to improve significantly if it is to engage individual investors and beneficiaries and mainstream investment analysts and fund marketers. In The Great Debate at the RI Europe 2016 conference this week, four industry experts will debate the motion: “This House believes that, on the issue of ranking and rating of funds and managers, our industry is moving in the right direction…”
Stepping into the spotlight to argue FOR the motion (that ranking and rating is improving) are: Fiona Reynolds, Managing Director, Principles for Responsible Investment and Naomi English, Head of ESG Products for EMEA and APAC, MSCI.

FOR (Arguing that our industry is moving in the right direction)

The case
  • Transparency is a must in the modern world; ranking is an inevitable part of open and informed markets; anything that informs the end investor and breeds confidence about SRI is to be welcomed
  • Governments are more likely to support the development of (and regulate in favour of) SRI if our markets can demonstrate end-to-end transparency and investor information
  • Quantitative ratings and rankings bring rigour to the assessment of managers are actually doing; anything else is subjective and open to abuse
  • Basing ratings on the underlying holdings of funds are credible measures as they measure where managers are actually putting their money – not just the processes that they claim to be putting in place
The challenges
  • The underlying data on which ratings are constructed is not yet good enough
  • Company ratings don’t belong in equity markets at all; ‘mainstream’ investors only use ratings for fixed income but not for equity
  • The technocratic systems that are being proposed are more likely to alienate than enthuse individual investors and beneficiaries
  • The processes involved in getting rated can be overly time-consuming and bureaucratic
  • No single rating system can incorporate the many different styles of SRI management – ranging from integration through engagement and from best-in-class through thematicAnd on the AGAINST side arguing (perhaps) that there are better ways of evaluating asset manager engagement with sustainability and corporate governance are:
    Seb Beloe, Head of Research, Wheb Asset Management and Jennifer Anderson, Investment Officer, The Pensions Trust.

I’m chairing the debate. To warm things up I’ve prepared some rough notes on the arguments that each side might put:

AGAINST (Arguing that our industry is NOT moving in the right direction)

The case
  • See challenges to the FOR case
  • Impact is the only thing that matters; until we have better ways of measuring this (which we are working on), we are better not to confuse the end consumer/investor with suboptimal systems
  • The market (of all investors together) is a better determinant of what matters to investors; no single firm/agency/industry body can / should claim to be able to judge authoritatively what is good and what is not
  • Each institutional owner ultimately has to evaluate the managers that they have available to them against their (the owner’s) particular requirements; guidelines for doing this are helpful; generic ratings systems are not
The challenges
  • If we wait for the perfect ratings system to emerge, we’ll never get one at all
  • The ‘investing market’ needs guidance; all rankings and ratings aim to do is provide information that investors can use or ignore
  • Fund and manager raters do not pretend that their info should be used in isolation from other measures of manager activity / fund performance
  • The economics of rating funds across the market don’t add up unless you use a data-based approach; it’s simply too expensive to engage in a qualitative assessment of each and every fund, strategy or manager.

RI Europe 2016 is almost sold out. Have you got your ticket yet?
June 22-23, London. 600+ delegates, 250 companies. Don’t miss out. Take a look who’s coming

Click here to sign up for a free trial to Responsible Investor