ESG ratings and ratings agencies have been subject to scrutiny since their inception. The benefits are clear enough. Ratings help investors and other stakeholders quickly assess a company’s ESG credentials. However, the reality is more complex. Ratings methodologies are often proprietary “black boxes” and some accuse ratings agencies of self-dealing with their consultancy arms. A new study looks at the ratings landscape in the UK and EU. It regards raters as “regulatory intermediaries” and finds that policies must support increased trust between these intermediaries, and markets on the whole:
“Regulatory intermediaries play a central role in the allocation of trust to regulatory agents. This holds for both trust-building and trust-repair policies. At their best, intermediaries reinforce regulation via trust, and they regulate trust via regulation. At worst, intermediaries undermine trust in regulation and trust-based regulation; hence the issue of ‘washing’ strategies such as greenwashing. Whether trust is treated as an alternative or as a complement to regulation, such approaches implicitly perceive trust as necessarily a good thing, allowing for more win-win outcomes. Distrust, or the destruction of trust, is then something to be repaired, including by way of regulatory intervention.”
The study examines the impact that UK and EU ratings legislation has had on trustworthiness. It finds that the regulation of raters by governments can help improve trust in ratings. This is something I wrote about back in 2023, when ratings regulations were getting off the ground. Ultimately, ratings may not be perfect, but the EU and UK have come a long way towards building reliable, sustainable finance metrics.
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