What is the value of ESG ratings for responsible investors in allocating capital towards sustainable companies? : evidence from European institutional investors

Abstract

There is a strong momentum to complement traditional financial measures with sustainability indicators. In that regard, the ESG ratings market plays a role of intermediary between the corporate and the investment sectors. However, rising concerns over their relevance imply that trillions of capital might be wrongfully allocated. This thesis aims at assessing the value of this tool for institutional investors, by understanding the necessity to integrate this sustainability research in responsible investment strategies. This paper investigates the various main ESG ratings providers and their methodologies, as well as the challenges encountered in their application. An in depth analysis of both an academic review and nine interviews with small to very large institutional investors across Europe comes to the following conclusion: ESG ratings enable to make sustainable investment mainstream, by offering unrivalled coverage and the broad expertise the market needs. Their use comes with many drawbacks, but precautions, such as in-house research, are taken by investors. The recent scrutiny from the European Commission around this tool will probably unveil the importance of sustainability ratings in the sustainable finance agenda. More transparency and affordability are required to develop this ESG ratings market in the right direction, thus allocating capital towards sustainable companies.