The methodology used by rating agencies is not transparent and the ratings vary widely for the same company. In order to be useful and trustworthy, the ratings have to be reliable and comparable. There are also concerns that there might be conflicts of interest.
S&P Global, Moody’s, MSCI and Sustainalytics by Morningstar are some of the biggest issuers of ESG ratings.
Investors are increasingly considering ESG ratings in their investment decisions, but rating providers are not yet regulated. ESG rating methodologies are criticised for being opaque and are rewarding companies that disclose more information, regardless of their ability to manage and mitigate ESG risks.
Under the new proposals, the European Securities and Markets Authority (ESMA) will authorise and supervise ESG rating providers, to ensure the quality and reliability of their services and methodology. ESG rating methodologies will be validated by the ESMA. The proposal also includes requirements to prevent potential conflicts of interest, demand transparency of rating methodologies and models and key rating assumptions.
The regulation could force rating agencies to separate their rating operations from their ESG consulting operations, under two different companies.
In March of this year, the UK also called for more transparency on ratings, and in developing an ESG Data and Ratings Code of Conduct.
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