For over a decade, CDP has advocated for mandatory environmental disclosure as we are convinced of the importance of making corporate environmental disclosure mainstream to make progress on the global environmental agenda. It is vital to support our ability to meet the Paris Agreement goals, the Sustainable Development Goals, and the Global Biodiversity Framework. However, to ensure the effectiveness of disclosure, it is crucial to ensure the data reported is high quality.
Recent developments in the standard-setting ecosystem, such as with the creation of the ISSB and ESRS, are contributing to this objective. So as the availability and quality of ESG data grows, an important question to ask is: “How can we make sure that the information disclosed is used to make decisions that advance the net-zero, nature-positive transition?”
As a compass to guide capital allocation, ESG ratings and data products may support the allocation of capital towards the fulfillment of the global environmental agenda. The role of these tools has increased significantly in financial markets, with many investors now integrating ESG ratings and data products into their decision-making processes.
No surprise, these tools are also facing increased scrutiny. Shortcomings associated with the quality of the ESG data used in these products, the lack of transparency around their methodologies, and potential conflicts of interest in the provision of these assessments have led regulators to take a closer look into this market.
The state of play
Since 2020, significant developments have taken place. Jurisdictions across the globe, including Europe, the United Kingdom, Japan, India, and other countries in the Asia Pacific region have consulted on the provision of ESG ratings and data products. Research undertaken by the International Organization for Securities Commissions (IOSCO) in 2021, followed by their Call for Action in 2022, has inspired several jurisdictions to introduce policy initiatives, such as voluntary codes of conduct or more stringent regulations, on the provision of ESG ratings and data products.
In December 2022, Japan’s Financial Services Agency (FSA) pioneered, launching the first Code of Conduct for ESG Evaluation and Data Providers. Other supervisory authorities, such as the UK Financial Conduct Authority (FCA), have already announced their intentions to adopt similar approaches. In Europe, a legislative proposal is expected to be introduced by the European Commission in June 2023.
The challenge
As policy develops around this topic, it is fundamental to secure an inclusive and collaborative policymaking process that allows users, providers, civil society and regulators to work together ensuring that ESG ratings and data products are effectively supporting the fulfillment of the global environmental agenda.
Under this backdrop, CDP, together with the Future of Sustainable Data Alliance (FoSDA) organized a roundtable discussion in March 2023 on “Steering the role of ESG ratings and data products.” The event gathered policymakers, industry and investors associations, regulators from several jurisdictions across Europe and Asia, and several providers of ESG ratings and data products.
Key findings from CDP’s upcoming report on the topic guided the discussion, which focused primarily on limitations and opportunities associated with the provision, use, and regulation of ESG ratings and data products. On the role of ESG data, Sherry Madera, Chair of FoSDA, shared an important message: “Data is the solution. Data is not the problem. Data is not the scapegoat for why you can't do something and push forward on sustainability. But we have to acknowledge this is a journey that requires constant improvements, and we must be as open as transparent about this.”
The way forward
In general, there was a degree of consensus among providers and investors that jurisdictions – and their subsequent regulations – should agree on the definitions of what constitutes an ESG rating, an ESG data product and an ESG score, among others. Participants also agreed that regulating methodologies of ESG ratings and data products may not have an immediate value, as it can hinder innovation. Alternatively, there was a high level of consensus that ensuring full transparency of the methodologies would be beneficial.
This summer, CDP will publish a report on this topic with key findings and recommendations associated with the provision and regulation of ESG ratings and data products. In addition, in the upcoming months, more jurisdictions are expected to consult and introduce regulations or codes of conduct on the provision of these evaluation tools. Therefore, maintaining an open and collaborative dialogue among stakeholders is crucial to guarantee the effectiveness of these policy initiatives. ESG ratings and data products can support an evidence-based transition to a net-zero economy. Together, we must make sure they do.