Key Points Considered
Should regulation focus on creating consistent comparable ratings? The current variety in ratings shows the wide range of methodologies in use, particularly considering providers rely heavily on the same company disclosed data. However, if rather than focusing on consistency of ratings, regulation could focus on the transparency of methodologies. This could avoid the need for a complete overhaul of ESG rating methodologies (and the ratings assigned) and would therefore be less disruptive. Investors increasingly reliant on ESG ratings also need to understand and accept that incorporating ESG data into investment decision-making is more art than science.
Would regulation eliminate the need for in-house modelling? Georgina looks at how investors using ESG ratings in conjunction with proprietary ESG analysis, provide a deeper dive into a variety of metrics, data and initiatives. This combined approach and an effective engagement strategy can facilitate material ESG integration. She concludes that ‘these findings should form the basis of an effective stewardship and engagement strategy to arrive at a more informed view.’
|Figure 1. Pros & Cons to a Surplus of Unregulated ESG Rating Providers|
|Source: Citi Research|
For more information on this subject, please see ESG & SRI - ESG Rating Providers Proliferate but Is Regulation Looming?.
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