Rating the Raters Yet Again: Six Challenges for ESG Ratings

In June 2022, the United Kingdom Financial Conduct Authority (FCA) declared its support for efforts to include ESG rating agencies under its regulatory authority. At an industry event soon after, FCA’s ESG director Sacha Sadan said: “We should try to regulate ESG ratings to try to get much more commonality because they’re very important— they’re being used a lot — but there’s also so much confusion. And we’ve seen that debate, where certain oil and gas stocks are in a rating, and certain stocks like Tesla are out. Not saying one is right or wrong, but the methodology is being confused”. Sadan’s emphasis that all parts of the investment chain have obligations of transparency and accuracy is just one of many indicators that 2022 marks a sea change for discourse on ESG ratings according to ERM.

ERM has highlighted six challenges that the industry is facing. Carmen Ng, Director at SquareWell Partners, commented to ERM that “While we don’t view rating divergence to be an issue, it is important for companies to determine the main ESG data and ratings providers as well as spend time to understand their methodologies and the underlying datasets to ensure that they are capturing as much as possible the money that can be re-directed to the company through passive investment strategies.”

The full insight from ERM can be accessed here.