ESG ratings are being increasingly criticised for their lack of consistency in assessing companies’ sustainability and ESG performances. The UK’s Financial Conduct Authority (FCA) recently cited that the opacity of the methodologies of behind aggregated data-based scores and ratings is eroding trust in the markets they seek to serve. The FCA said it is “carefully considering” 240 responses to a consultation it launched last year into whether it should regulate the ESG ratings sector. The European Union has also begun a process of weighing the pros and cons of regulating the firms.
Calls for ESG ratings firms to be regulated were hammered home by the recent Rate the Raters survey. Conducted annually by sustainability consultancy ERM and the SustainAbility think tank and released at the end of March, the study of the views of 450 investment professionals and 1,400 corporate sustainability professionals across 29 countries found a general dissatisfaction with ESG ratings providers.
More than half of respondents’ said ratings were the most important data sources used in their decision-making processes. Only in-house data ranked just a highly; third-party data was the most common source of ESG information for just two-fifths of investors.
The UK’s Investment Association cited the FCA’s proposals, unless properly calibrated, could place undue burdens on its members. Conservative politicians’ attacks on sustainability markets, particularly in the US, have often focused on the raters, branding them as “black boxes” for their often closely guarded assessment methodologies.
SEC Settles First Case Brought by Climate and ESG Task Force
Two weeks ago, the U.S. Securities and Exchange Commission (SEC) announced that it had settled its ongoing litigation with Vale S.A., a Brazilian mining company whose American depository shares and notes are registered with the SEC and publicly traded on the New York Stock Exchange. The SEC alleged that Vale knew its Brumadinho dam, which collapsed in 2019 and killed 270 people, was unsafe before its collapse and made false disclosures about the safety of the dam to deceive authorities and investors. Notably, the allegedly false statements occurred in the company’s disclosures related to environmental, social, and governance (ESG) matters contained in sustainability reports, periodic filings, and other disclosures. Under the settlement, which remains subject to court approval, Vale agreed to pay $55.9 million to settle the charges.
This was the first case brought by the SEC’s Climate and ESG Task Force. The case highlights the SEC’s increasing focus on ESG-related disclosures and demonstrates the SEC’s willingness to bring enforcement actions under the existing disclosure framework where it views ESG-related disclosures to be false or misleading.
FCA Takes Anti-Greenwashing Actions
On Tuesday, the FCA announced it will be work with twelve international regulators to develop a global tool to fight greenwashing risks within financial services. As part of the Global Financial Innovation Network's first Greenwashing TechSprint, the initiative will address greenwashing as both "deliberate or inadvertent" forms of mis-spelling. The World Bank, the Reserve Bank of India and the Dubai Financial Services Authority will all participate.
The group will look to see how technology, AI and machine learning could be used to verify that any sustainability-related product claims being made to retail customers are accurate, as well as collating examples from across jurisdictions.
The FCA said: "The number of investment products marketed as ‘green' or making wider sustainability claims is growing. Exaggerated, misleading or unsubstantiated claims about Environmental Social and Governance (ESG) credentials damage confidence in these products and the FCA wants to ensure that consumers and firms can trust that products have the sustainability characteristics they claim to have."
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