Ethical Performance
inside intelligence for responsible business
 

editorial

consolidation of SRI rating agencies benefits the market

September 2005


A few years ago, specialist agencies rating companies' social, environmental and ethical record were popping up all over the place. Now the talk is of consolidation. Ethibel and Vigeo have merged, creating Europe's largest socially responsible investment agency that controls a quarter of the market in continental Europe (see page four). Last year, Det Norske Veritas bought CoreRatings. Meanwhile, Ethical Investment Research Services has cut the number of international partners from which it sources information, and brought some of the work in-house.

This has implications for companies. In value terms, the SRI rating market is tiny, but its influence is out of all proportion to its size. Eiris alone supplies data for FTSE4Good, Business in the Community's Corporate Responsibility Index and the London Stock Exchange's Corporate Responsibility Exchange - in addition to 80 institutional clients. Companies may gripe, but when agencies make a judgement, however imperfect, investors and others, including the media, generally take notice.

From the viewpoint of market efficiency, consolidation is good news. It should mean fewer questionnaires. Vigeo is right when it says there are too many agencies and some need weeding out. Companies will have a better idea who the important players are. Bigger agencies will have the resources to improve the quality of their research, providing comparable data so that investors can make more meaningful comparisons between companies. Pulling together the necessary information within a coherent research framework that takes account of the differences between companies is a big job - one that, arguably, no rating agency has yet met.

Moreover, standards should rise. Many of the providers have long been vulnerable to the charge that their research methods are opaque. Consolidation will further encourage the main players to make the basis of their assessments plain, putting the spotlight on those which do not.

But if some consolidation is good, too much will go against the grain of this market. Diversity has always been one of SRI's great strengths. The wide range of investment approaches exists precisely because customer demand is diverse.

Basically, institutional investors' appetite for this type of information is driving the mergers. Morgan Stanley and Oxford Analytica predict that within four years SRI will account for 15 per cent of the UK stockmarket alone, and international credit rating agencies are beginning to show interest. It would be a shame if, in acquiring higher standing, SRI forgets its roots.





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