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Keeping you in-the-know on environmental, social and governance developments

Just yesterday, I blogged about letters sent by 5 senators to 51 law firms threatening antitrust legal action against the firms because they offer ESG legal services to clients. Well, today is another note in that same song.

Back in September, Senator Pat Toomey sent a letter to Morningstar’s Sustainalytics expressing concern over ESG ratings:

ESG ratings firms, such as Sustainalytics, play a key role in this activity by evaluating the degree to which more than 10,000 companies meet certain qualitative standards. As a result, they have the ability to influence capital flows to many companies.

Notably, ESG ratings take into consideration information about companies that go beyond the extensive public disclosures firms are required to make under federal securities laws… In determining a company’s ESG rating, however, many ESG ratings firms consider information that is not material or financially relevant under federal securities laws.

Toomey asked for documents related to the firm’s ESG rating methodologies and posed a series of 17 questions about:

  • how the firm engages with companies it rates,
  • how it ensure data quality,
  • how/if the ratings take political issues into account and
  • conflicts of interest with regard to providing opinions/recommendations for proxy votes and consulting services offered in relation to its ratings

The deadline for submitting the information was September 28, 2022. The company apparently provided information on October 24, but Toomey wasn’t satisfied, claiming “Staff review of your response dated October 24, 2022 found that Sustainalytics failed to respond to questions 3, 4, 6, 8, 9, 10, 11, 15, and 17.” He issued a follow-up letter October 31 that took a more threatening tone:

… legitimate bipartisan concerns have also been raised regarding the veracity of third-party data, the opacity of rating methodologies, the processes by which ratings firms engage with rated entities, and the management of conflicts of interest.

Given the above concerns and increased bipartisan interest in conducting oversight of the ESG industry, it is crucial that your firm provide the information I requested on September 20. In addition, please preserve all documents, communications, and other information, including electronic information and metadata, that is or may be potentially responsive to my September 20 information request.

In the future, I strongly advise your firm to be more responsive to information requests from Congress, particularly the committees with oversight of your industry.

I think this is a strong signal that regulation of ESG ratings in the U.S. is highly likely in the near future, especially if yesterday’s midterm elections turn Washington more red than blue. But unlike the law firm letters, this effort by Toomey is based more on reality and facts, especially with regard to concerns of data quality/veracity. I have long expressed concern over that very matter, having spent decades auditing/validating much of the environmental data generated internally by companies that is reported externally. In addition, questions about potential conflict of interest in offering services related to the ratings are valid. I am less gobsmacked by Toomey’s letter than the letter from the Group of 5, yet they are both from the same tune.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile