Reflection note on ESG Ratings

Triggered by the European Commission’s consultation last April1, GUBERNA engaged in the debate on ESG ratings. GUBERNA is no novice in the matter: it has already published a critical analysis of corporate governance and CSR ratings in the past2, while related initiatives on non-financial reporting and sustainable governance are closely followed up.

Being a knowledge institute, GUBERNA mapped the most relevant and crucial issues put forward by recent global and European studies on ESG ratings and ESG rating providers. For sure, a common theme among ESG providers is investment risk reduction. But the most striking findings are the huge discrepancies in ESG ratings caused by various reasons such as

• differences in measurement methodologies of ESG factors as well as in data resources and interpretation processes;
• biases : geography, size, industry, et.;
• lack of expertise of employee staff;
• lack of standardisation of ESG disclosure.

In addition, the risks of potential conflicts of interest of ESG rating providers and of green and social washing are well documented. As a result, there is already an international call to enhance the transparency of the operations and methodologies of the ESG rating providers, as well as to improve the comparability of ESG ratings. Not surprisingly these calls have triggered the question to what extent oversight on ESG rating providers is desirable and future regulatory interventions on the subject is required.

To complement these findings, GUBERNA aimed to capture the view of the Belgian practitioners and called upon its member network. Particular emphasis was given to the Belgian reality and, among other things, to the observations, concerns, suggestions, and inputs raised during the roundtable held on the 1st of June 2022 which witnessed the engagement of several participants, including directors of Belgian listed companies, industry experts, as well as other interested parties.

It is remarkable that the members involved raised similar critics and concerns as identified on an international scale. In particular a lack of transparency from and engagement with ESG rating providers, as well as a lack of reliability of ESG ratings were stressed. The participants echoed the call for further improvement by means of a greater harmonisation and clarity of regulations (instead of additional regulatory requirements and increased uncertainty of non-compliance) as well as more uniform standards. Potential initiatives in this regard should stimulate a real pursuit of ESG activities (instead of green or social washing and box ticking) with a focus on the long term impact (distinct from short term ratings). Of particular concern however is the position of SME’s, clearly lagging behind, in need of support and less burdensome requirements.

Finally, best practices are also noted as ESG ratings are used internally as a tool by some companies, helping them to assess their progress on the path towards sustainable business practices. The participants to the roundtable would like to simulate a learning process, inspiring each other, among others, by means of collaboration and partnerships.

Based on the insights retrieved from the literature study and the input from its members, the key findings can be summarised as follows:

• Policy makers should aim for legislative harmonisation and clarity between national, European and global rules, as well as coherence with other EU rules.
• In case regulatory intervention is considered, it should be proportionate, taking into account the high administrative burden for companies, also considering the specific situation of SMEs in that regard.
• In case regulatory intervention is considered, it should promote genuine action on ESG topics and prevent (more) green washing (or alike) or box ticking.
• The development of standards should be encouraged to ensure common definitions, minimum quality / reliability of the ratings, as well as to increase transparency on the used methodologies.
• More enhanced engagement between the companies and the ratings agencies should be envisaged.
• The development of Codes of Conduct to prevent conflicts of interests (of ESG rating providers).

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