There is significant disagreement amongst sustainable finance stakeholders about the value of ESG ratings, with over half saying they should be scrapped altogether, according to a pulse survey carried out by 2° Investing Initiative (2DII). 169 respondents answered the survey from 10-18 May, including roughly 50% ESG finance professionals, as well as stakeholders from the non-ESG finance, academic, research, and NGO sectors. The findings have a number of implications for regulators as ESG ratings providers have been under growing scrutiny, with Tesla’s recent removal from the S&P ESG index sparking renewed debate.
Access the full results here.
- There is significant disagreement amongst stakeholders about whether ESG ratings should represent scores focused on “sustainability risks” or “sustainability footprint”, although within stakeholders, theory and practice are largely aligned. The notable exception are academics and NGOs, who see a significant gap between what the ratings should represent in theory and what they represent in practice.
- Survey respondents disagree as to what ESG ratings should measure. The majority of respondents also think that ESG ratings currently measure the wrong thing in practice relative to what they should measure in theory. The close alignment identified in Finding #1 between theory and practice among finance sector professionals is thus primarily driven by a systematic disagreement that ‘neutralizes’ the results.
- An overwhelming majority of respondents do not think that there is a meaningful correlation between the sustainability risks a company faces and their “sustainability performance” (i.e. footprint), suggesting that it is not possible to provide ratings that integrate both aspects in one score.
- Survey respondents strongly believe that ESG ratings should ideally be correlated across service providers.
- 86% of respondents think it should be mandatory for ESG scores to provide the constituent “E” & “S” & “G” score as individual parameters, with a minimum of 80% support across all stakeholders.
- The majority of survey respondents would go even further and are in favour of abolishing aggregated ESG ratings that merge environmental, social, and governance issues, and replacing these ratings with individual “E”, “S”, “G” ratings.
- There currently is not market support for creating regulatory conditions under which firms can be barred from providing ratings in case of significant underperformance.
Based on the findings of the survey, any ESG ratings regulation should:
- Define whether these types of ratings should relate to sustainability risk or the sustainability footprint of a company.
- Enforce standards around the criteria related to identifying risk or sustainability drivers.
- Delineate whether a rating targets sustainability or risk objectives. This recommendation is supported by +80% of survey respondents.
- Drive ESG ratings convergence through definition of standards.
- Require that ESG scores must always when presented in marketing or communications materials also provide the individual E & S & G scores.
- Define regulatory constraints around the extent to which aggregated ESG ratings may be provided versus ratings on individual sustainability themes, similar to the work on taxonomies.
- Develop a set of standards and rules related to the right to provide ESG ratings.
Jakob Thomae, Executive Director of 2DII Germany, said: “ESG ratings have received a lot of criticism in the past few weeks, from Goldman Sachs to Elon Musk. The problem is however that we can’t seem to make up our mind about what they are supposed to do – score risk or sustainability. As this survey shows, most professionals don’t think it’s the same thing. We ultimately don’t seem to be speaking the same language. However, what is clear is that there is a need for reform and regulatory intervention, starting with the requirement to give each sustainability issue its own due rather than aggregating it all together into one unintelligible score.”
About our funder:
This research has received funding from the European Climate Foundation. Disclaimer: This work reflects 2DII’s views only, and the funder is not responsible for any use that may be made of the information it contains.