Active vs Passive Fund ESG Approach: Does an ESG rating matter?

Highlights

• Companies should strive for meaningful sustainable development instead of chasing backward-looking ESG ratings.
• ESG ratings matter to passive-fund investors, tracking bespoke indices.
• Investors will look beyond ratings when assessing ESG performance.
• Knowing the ESG approach of your investor will help inform corporate strategy

Environmental, Social, and Governance ratings have become a key focus for companies and investors. By achieving good ESG ratings, a company can receive positive market recognition. As a result, companies now tend to spend more time and effort on improving ESG ratings in order to attract investors.

ESG ratings are relevant to passive-fund investors tracking bespoke indices. But not all investors rely on ESG ratings. Active-fund investors are more likely to exercise active ownership through direct engagement with companies on ESG topics.

A better understanding of investor ESG approach will help companies formulate ESG strategy and create meaningful sustainable development instead of chasing backward-looking ratings.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.