OSC highlights need for clearer ESG metrics as ratings shape retail investment choices
The Ontario Securities Commission (OSC) has released results from its latest study on how environmental, social, and governance (ESG) factors impact retail investor decision-making.
Findings show that ESG ratings play a significant role in influencing investor preferences for investment funds, ranking only behind a fund’s past performance.
The study observed that both the presentation and strength of ESG ratings—whether through a letter grade or a star rating—significantly affected choices made by retail investors.
The report, titled ‘A Behavioural Insights Analysis of the Effects of Environmental, Social, and Governance Factor (ESG) Disclosure and Advertising on Retail Investors,’ outlines several challenges investors face when evaluating ESG elements in funds.
The lack of standardized definitions and inconsistent measurement of ESG factors, along with varied rating and ranking criteria, complicates investors' ability to assess these factors accurately.
In its key findings, the study notes that ESG ratings were the second most influential factor in fund selection, following fund performance.
Star-rated ESG scores positively influenced fund selection more than letter grades, while some investors even preferred funds without an ESG rating to those with lower ratings, indicating a threshold where ESG ratings may deter rather than attract investment.
The research also categorized investors into two types: those motivated by values and those driven by financial outcomes.
“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,” said Leslie Byberg, executive vice president, Strategic Regulation at the OSC.
Byberg highlighted the OSC’s concern about transparency, emphasizing that clearer ESG ratings would support more informed investor decisions.
The OSC’s recommendations suggest potential standardization of ESG ratings and enhanced educational outreach to improve retail investors' understanding of ESG investing.
Better knowledge would help investors distinguish between risks and potential impacts of funds, while also allowing them to recognize signs of greenwashing.
The OSC also promotes ESG-specific training for financial advisors to better equip them to guide their clients effectively.
