Is it Time to Regulate ESG Scores and Ratings?

End-users are seeking more transparency around cost and methodology to improve comparability across third-party vendors.

With an ever-increasing focus by asset managers and institutional investors on incorporating ESG factors into investment decisions, demand for ESG scores and ratings has seen a complementary surge.

Assessing ESG performance across multiple criteria is challenging, as it can be disparate and difficult to compare. Supporting due diligence with quantitative data, ESG ratings and other tools have emerged to help asset managers and investors evaluate and compare current investee companies and future investment prospects.

These data services have been a helpful proxy for investors with limited time and resources when looking to avoid ESG risks across extensive portfolios. But now their future is in question.

In Europe, there are tougher regulatory expectations for asset managers to take into account, such as the European Commission’s (EC) Sustainable Finance Disclosure Regulation (SFDR), Non-Financial Reporting Directive (NFRD) and the EU Taxonomy. Collectively, these changes are holding asset managers to a higher standard when offering sustainable investment products. For investors, clearer guidelines make it easier for them to assess whether managers and investee companies are aligning with new guidelines for sustainability disclosures, ESG product definitions and ESG-tilted funds.

As a result, pressure is rising for higher standards to be enforced on third-party vendors, through regulations that call for more transparency on ESG scores and ratings … [continues]

Read the full article on Regulation Asia’s sister publication, ESG Investor.

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