OSC study finds ESG ratings greatly influence investor decisions but are difficult to understand

TORONTO – The Ontario Securities Commission (OSC) today released the results of a study examining the influence of environmental, social and governance (ESG) factors on retail investor decision making.

An experiment found ESG ratings were one of the most important attributes influencing investor preferences when selecting investment funds—second only to a fund’s past performance. The strength and format of the ESG ratings (letter grade and number of stars) also greatly influenced the choices of retail investors.

A Behavioural Insights Analysis of the Effects of Environmental, Social, and Governance Factor (ESG) Disclosure and Advertising on Retail Investors also highlighted challenges retail investors face in evaluating the ESG components of investment funds.

The report identified challenges for investors when evaluating the ESG component of investment funds, including the lack of standardized definitions and measurements of ESG factors and the differences in rating and ranking variables.

Some of the key findings of the experiment included:

• The ESG rating stood out as one of the most important attributes influencing consumer choice — second only to a fund’s past performance.
• Star-rated funds had more positive influence on fund selection than letter-rated funds.
• The absence of an ESG rating was preferred to some ESG ratings, suggesting that there is a threshold at which ESG ratings transition from a motivating factor to a deterrent.
• Two segments of investors were identified: those who are values driven and those who are financially driven.

“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. “The OSC is concerned about this lack of transparency, and clarity around ESG ratings will help investors make more informed decisions.”

The research recommends that potential standardization of ESG ratings and other ways to improve clarity will help investors to better assess these investments. Improving retail investors’ understanding of ESG investing through education and outreach will allow them to differentiate between the risks and the impact the fund may have, as well as enable them to better identify signs of greenwashing. Promoting financial advisor training on ESG investing will help advisors better support their clients.

For more information about ESG investing, investor protection and behavioural science, visit GetSmarterAboutMoney.ca and sign up for the OSC e-newsletter, Investor News.

The mandate of the OSC is to provide protection to investors from unfair, improper or fraudulent practices, to foster fair, efficient and competitive capital markets and confidence in the capital markets, to foster capital formation, and to contribute to the stability of the financial system and the reduction of systemic risk. Investors are urged to check the registration of any persons or company offering an investment opportunity and to review the OSC investor materials available at https://www.osc.ca.

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