MSCI, one of the most influential gatekeepers of environmental, social, and governance ratings, is about to downgrade the ESG ratings of 31,000 investment funds in one fell swoop. The dramatic move comes after MSCI decided to update its methodology and require funds to meet higher standards for AA or AAA ratings. One would expect a move with such a potentially far-reaching impact on financial markets to be scrutinised in advance by regulators. Alas, ESG ratings providers (ERPs) have so far flown under the regulatory radar.
ESG ratings are instrumental to guiding investment decisions. But, as the MSCI downgrades indicate, they are currently highly subjective and, often, inflated. In fact, as many as half of the companies included in a 2021 Bloomberg Businessweek analysis had been upgraded by MSCI as a result of methodological changes. Just two years later, a fresh round of changes is bringing mass downgrades -- and even more uncertainty.
