ESG ratings and reports need to be standardised, experts warn
ESG reporting and ratings need to be standardised and enforced properly to help consumers and investors understand the sustainability credentials of companies and investment products, experts have said.
Giving evidence to the business, energy and industrial strategy committee yesterday (October 11), Emma Wall, head of investment analysis and research at Hargreaves Lansdown, said availability of information to assist consumers and investors is key when it comes to sustainability data and corporate reporting.
“Availability of information to consumers to investors, be it a standardised annual report, [or] on your website, standardised language and reporting would be a huge help.”
This would also assist in making it easier to compare large companies, with huge reporting capacity, with SMEs.
“When we’re considering whether a business is good on ESG factors, looking at a huge financial services employer like BlackRock, for example, we are holding them to a different standard than we might do a small boutique asset manager who has a hundredth of the employees and disposable income.”
Splitting the E, S and G can make it easier to understandAneesh Raghunandan, LSEA spokesperson for the FCA said it has made it a priority to ensure investors are given "clear and reliable" information about ESG products.
"This includes considering where new rules are needed as well as communicating specific expectations on the design, delivery and disclosure of ESG funds under our existing rules.
"We actively monitor this sector and will respond where we see serious misconduct.”
Wall also focused on the need for ratings agencies to conform to standardisation.
“You can see [the same] firms with widely different [ratings] outcomes” she said, because of the qualitative overlay that goes into a rating.
Aneesh Raghunandan, assistant professor of accounting at the London School of Economics said this comes down to the issue of dimensionality.
“There are so many things you’re trying to agglomerate into under one roof [in a rating]…it’s just hard to do.”
Instead of measuring companies on an overall ESG rating, it might be better to split the three terms out, he added.
Raghunandan gave the example of an investor who wants to pick low carbon firms, if picking ESG funds that investor will then have to try and identify which are carbon friendly.
“Splitting [the E, S and G] can make it easier to understand."
Underlying the effectiveness of all of this is the effectiveness of regulatory enforcement, Raghunandan said.
“In order for any regulation whatsoever to have any impact, you need companies to comply.
The focus should be on the need to take existing regulation seriouslyAneesh Raghunandan, LSE“In order for compliance to happen there needs to be a credible threat of enforcement for non-compliance.”
He said this should be focused on inaccurate filing, and not just late filing.
“[The focus should be] not so much on the need for more regulation, but on the need to take existing regulation seriously.”
Earlier this year, the Financial Conduct Authority expressed its support for the regulation of ESG data and ratings agencies after consulting the industry.
Ratings are increasingly used by the investment sector as ESG is embedded into companies’ activities and product offerings.
However, the regulator acknowledged that though there is a very low correlation between different providers’ ESG ratings on any given entity, it does not think this is a potential issue for the industry.
This reflects the “inherent multidimensionality of ESG”, the FCA said, as well as the always-improving methodology.
As long as the providers are transparent about their methodology and the data they use, have robust governance, manage conflicts of interests and have systematic processes and controls, these ratings differences are not considered as a source of harm.
sally.hickey@ft.com
