ESG ratings can add risk to investors on a not-so-well understood topic

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ESG ratings can add risk to investors on a not-so-well understood topic

• Well-intended ratings providers are operating without a common set of standards.
• Rapid growth in an industry lacking regulatory oversight has resulted in confusion and added work.
• Regulators recognise the lack of standardisation, transparency, and the need for action.

Intensified focus on climate-risk, the growing numbers of ESG ratings-providers, and a lack of common standards is causing confusion, and uncertainty among investors.

With the realisation that ESG considerations, policies, and practices can have a positive correlation between a company’s financial performance, the demand for ESG ratings-providers is growing with more than 650 worldwide, used by two-thirds of investment managers. 

Yet unlike the credit-rating agencies, ESG ratings-providers follow a user-pay model, and their accelerated demand has brought with it a lack of regulatory oversight, insufficient transparency, and inconsistencies on ESG scores.

You can read more about some of the challenges with ESG ratings in ESG Risk Guard’s recent article; ESG Ratings – Variations Without a Theme.

Brendan Walsh, Founder and Managing Partner of ESG Risk Guard who has a passion for sustainable development said,

“The lack of standardization is driving additional complexity, and cost across the ESG ratings community, ironically increasing risk among investors as they try to make decisions based on differing metrics, definitions, and ratings from multiple providers that are not tightly correlated. This adds massive confusion to a relatively new, not-so-well understood topic”.

Brendan continued,

“When a company lowers their ESG risk, they are actually lowering their financial risk which is what investors are looking for, transparency and clear communication on the ongoing progress and performance companies are delivering on their ESG goals. But how can a company genuinely provide assurances on their commitments if they don’t have a common set of understandable standards that the regulators can then adapt, adopt and implement?”

His words come at a time when climate change is one of the most significant global challenges, and calls by regulators, and governments recognizing the need for action, and setting common global standards are getting louder.

About ESG Risk Guard

ESG Risk Guard is a consultancy supported by a network of highly qualified, and globally experienced consultants with expertise across Audit, Compliance, Corporate Governance, Risk Management, and Sustainability (ESG).

For more information about ESG ratings, ratings-providers, and what is being done to address the ESG ratings situation, contact Brendan Walsh at esgriskguard.com.

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Company Name: ESG Risk Guard
Contact Person: D’Arcy Heath
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City: London
Country: United Kingdom
Website: www.esgriskguard.com

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