ESG rating agencies need to improve their transparency: sustainability reporting watchdog
Janice Lim
RATING agencies that assess and rank companies on their environmental, social and governance (ESG) credentials need to be more transparent about their methodologies, said an executive from Global ESG Monitor.
“Nobody really knows where they get the data from... And if somebody rates or ranks you, you have a right to understand how they do it. And that’s my criticism that there needs to be more transparency,” said Michael Diegelmann, founder of the watchdog that assesses the transparency of companies’ sustainability reports.
Diegelmann also said on Friday (Nov 10) that he hopes to see more regulators come up with laws that require rating agencies to be more transparent.
ESG rating agencies have been under increasing scrutiny over their lack of transparency in their rating methodologies, inconsistent ratings across same companies and incomplete data on companies – all of which gives rise to concerns over greenwashing.
Some of biggest ESG ratings providers currently are MSCI, Sustainalytics and S&P Global.
The problem is compounded when investors, who are often starved of credible ESG information of potential investee companies, usually rely on these ratings to make their investment decisions.
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Investors have often cited the lack of ESG data as one of the challenges which prevents them from allocating more funds into sustainable investments.
By being transparent on how the ratings providers come up with their ESG ratings, corporates can then understand what actions they can take to improve, said Diegelmann. He was speaking at a panel discussion that was part of the Corporate Governance Week conference organised by the Securities Investors Association (Singapore).
“So when you look at an ESG rating, they are 60, 70, 80 pages long. They are in very small font. Nobody can really read or understand them, from my experience. And they give you only the first rating,” he explained.
Diegelmann acknowledged that data collection is a major challenge many companies often face. “It is often an issue to understand what criteria are required from them, and how to gather and bring together all the data because it really needs a change in the corporate organisation to collect data.”
Besides the challenges surrounding ESG data, panellists also discussed whether there are trade-offs between a company integrating ESG and sustainability into its business and its financial performance.
Also speaking at the same panel, EQT Group’s managing director Joshua Kuma said that investors should look at the long-term gains they can get when their portfolio companies spend money and time to implement various sustainability measures.
These various measures require money, and companies may have to make additional capital expenditures, which may affect dividends.
“I don’t want to recommend (investors) to forego the expectation on dividend... Temporarily, they may have a little bit of setback, because (these sustainability measures) would increase their overheads. But it is very important for investors to look at – by installing all these measures, what is the total enterprise value of the company, how much the company value has been increased?” added Dr Kuma.
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