ESG ratings are controversial tools used primarily by investors to get a glimpse at a company’s ESG performance. However, with proprietary “black box” methodologies and results that often differ significantly from rater to rater, the ratings industry faces much criticism. This led the EU to develop an ESG ratings regulation, with other jurisdictions adopting voluntary guidelines for raters. The UK previously opted for voluntary guidelines, but the new Labour government is changing that, announcing recently that a mandatory ESG ratings regulation is coming next year. Reuters writes about the new law stating:
“Britain said on Thursday it would propose a law next year to regulate raters of company environmental, social and governance (ESG) performance, whose benchmarks help channel billions of dollars into sustainability-focused investment funds.”
The new rules will conform to the International Organisation for Securities Commission (IOSCO) guidelines published in 2023. Many view the move to mandatory rules as an effort to keep up with the country’s EU counterparts and ensure a roughly equal playing field for investors in both the UK and EU. With further regulation of ESG ratings, sustainability professionals may find an increased emphasis on ratings as regulation increases rating quality. Additionally, there should be more clarity on how companies in the UK and EU can increase their ratings as both regulations call for more transparency in raters’ methodologies.
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