Regulating ESG Ratings to Strengthen Sustainable Investors

There are five times more equity analysts than ESG analysts.

It makes it nearly impossible for ESG ratings to be on par with financial ones, according to Thierry Philipponnat in Finance Watch's latest policy brief.

This report delivers guidelines for EU regulators and supervisory authorities to transform ESG ratings into reliable and actionable market data:

• Aggregated ESG ratings are misleading and should be replaced by more granular E, S and G ratings
• Rating providers should be transparent about their data sources and methodologies, and specify whether each rating they provide uses a financial or impact materiality approach
• To prevent conflicts of interest, ESG rating providers should operate on an "investor pays" business model and be prohibited from selling consultancy services to companies they are rating
• Methodologies and data sources used by rating agencies should be approved by the ESMA before becoming operational
• ESG ratings should be aligned with or at least comparable to official frameworks such as the EU Taxonomy

The upcoming EU regulation of ESG rating providers is a precious opportunity to clarify the ESG rating landscape so that it meets the needs of investors and the broader society alike.

Missing any of the points stated in this report could introduce greenwashing opportunities instead of supporting allocation of capital to sustainable activities.