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Policy & Regulation / Sustainable finance
POLICY BRIEF – REGULATING ESG RATINGS TO STRENGTHEN SUSTAINABLE INVESTORS
17 May 2023
POLICY BRIEF
AUTHOR
THIERRY PHILIPPONNAT
FINANCE WATCH
REGULATION(S) COVERED IN THIS PUBLICATION
* ESG rating providers
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Download the publication
In a policy brief published on May 17, Finance Watch proposes concrete policy
measures to make ESG ratings reliable and meet the needs of ESG investors and
other stakeholders, including regulators, while also supporting the EU’s
transition to a sustainable economy.
RELATED POLICY AREA
SUSTAINABLE FINANCE
For finance to become truly sustainable, we need to think differently about its
development and about how it impacts on society and the economy.
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ESG ratings today are opaque and hard to compare.
* Under-resourced rating providers are measuring E, S and G in one rating using
different methodologies.
* Most rating agencies focus on the relative ESG performance of a company, not
the absolute.
* ESG rating providers usually assess the “financial materiality” (how
sustainability considerations affect businesses), when consumers think
“impact materiality” (how business activities impact communities and the
environment)
This has contributed to friction and misunderstandings between civil society and
retail investors on one side, and professional investors and corporates on the
other.
The upcoming legislative proposal on corporate ESG ratings expected from the
European Commission on 13 June is a key opportunity to strengthen supervision to
end the confusion.
In this policy brief, Finance Watch has put forward five recommendations for EU
policymakers:
1. Oblige ESG ratings agencies to provide individual, standalone sustainability
ratings for environmental, social and governance factors. For each, it
should be clear what is being assessed – financial returns or real-world
impact.
2. Link environmental assessments to the EU taxonomy and highlight any
significant divergences. Environmental assessments are not required to align
with the EU taxonomy of sustainable economic activities, but any differences
must be clearly explained to ensure a basic level of consistency. For
example, if a company is 2 percent aligned with the EU taxonomy but has been
granted an E status by an ESG rating provider, why and how this difference
has occurred must be communicated.
3. Make ESG rating more transparent. It should be mandatory for ESG ratings
providers to publicly disclose their methodologies, material objectives and
whether ratings are absolute or relative. Rating agencies should also make
it clear which data sources are being used and whether or not this data has
been audited.
4. Prevent conflicts of interest. ESG rating providers should be banned from
selling consultancy services to companies they are rating and from rating
their own shareholders. To ensure independence, no legal or natural person
should hold a participation over 5% in more than one ESG rating provider.
ESG rating providers must also put in place internal controls and processes
to prevent and control possible conflicts of interests.
5. Increase supervision. The provision of ESG ratings in the EU and their use
by investors should be overseen by the European Securities and Markets
Authority (ESMA), the EU Authority in charge of regulating and supervising
financial markets.
READ THE POLICY BRIEF
Page 1 / 29
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