ESG ratings have been fraught with issues since their inception. Over the past several years, some jurisdictions introduced voluntary and mandatory codes of conduct and rater regulations. This has led to some improvement in the ratings industry and financial services are beginning to see real value in ESG ratings. A recent CDP report shows encouraging data regarding how financial institutions are using ESG ratings stating:
“In 2023, 85% of [Financial Institutions] disclosing through CDP identified climate-related opportunities with the potential for substantive financial or strategic impact on their business. Of these, 18, with US$4 trillion in combined assets, identified ‘Improved ratings by sustainability/ESG indexes’ as the primary driver of substantive financial opportunities open to them.”
The legal landscape around ESG ratings is evolving as jurisdictions take action on the IOSCO’s 2021 recommendations. The report identifies six major jurisdictions adopting some form of guidance for ESG raters. The EU and India are adopting mandatory regulatory frameworks for raters, while Japan, Hong Kong, and Singapore adopted voluntary codes of conduct. The UK, which currently has a voluntary code of conduct, recently announced that formal regulations are coming. The global market is beginning to recognize the need for ESG rating regulations, and markets are responding by giving ESG ratings more attention. The ESG ratings industry has a long road ahead, but is trending in a good direction.
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