In another blog today, Lawrence mentioned ESG ratings controversies. Well, here is another. Recently, the EU held a consultation on regulating ESG ratings. The European Roundtable for Industry requested that the EU expand their regulation to include controversy scores. Controversy scores are created by ESG ratings firms based on public data including media and social media. These purportedly score a company based on its exposure to and handling of public controversies. Reporting from Responsible Investor discusses the Roundtable’s response stating that:
“Specifically, it urged policymakers to mandate greater transparency over rating agencies’ handling of controversies, including methodology, whether remediation measures are taken into account, the duration for which controversies impact scores and data sources.”
Others in the EU joined the chorus, including German industry body Deutsche Aktieninstitut, DHL Group, and the German Chemical Industry Association. The groups argue the existence of a controversy score in and of itself can deter potential investors and affect valuations; therefore, any controversy could result in exclusion from investment portfolios. This would hold true even if the controversy in question has been addressed by the company.
Industry groups felt that the discrepancies in controversy ratings could be remedied by further standardization, common principles, and dialogue between companies and ratings providers. They argue that bringing controversy scores into the scope of EU regulation will increase the quality of the scores and improve transparency in methodologies. Should the EU move ahead with regulating ESG ratings overall, this would almost certainly be within scope.
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