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- 94% of investors use ESG ratings monthly, yet regulatory fragmentation risks undermining their efficacy.
- Policymakers are grappling with inconsistencies across geographies, risking confusion and greenwashing.
- ESG tools offer value beyond compliance, aiding businesses in efficiency, risk management, and sustainability goals.
The Growing Role of ESG Ratings
With 94% of investors relying on ESG ratings at least once a month, the influence of these tools in financial markets has surged. Despite this, the data’s integrity and the consistency of these ratings are under scrutiny. As governments start rolling out voluntary codes and regulations, CDP is tracking and advising policymakers on how to maximize impact while preventing fragmentation in the system.
Challenges in ESG Data and Ratings
Significant gaps exist in how ESG data is collected, rated, and benchmarked. CDP’s “Data for Public Good” report highlights the challenges in objectives and methodologies, especially when it comes to how these tools are used across different regions.
Regulatory fragmentation is a growing concern, as varying ESG definitions across jurisdictions could confuse market players. This fragmentation could also hinder transparency and trust, two core objectives of policymakers seeking to regulate the market.
Global Regulatory Developments
Different jurisdictions are at various stages of implementing ESG-related regulations:
- United Kingdom: A voluntary, industry-led code of conduct is in place, with new regulatory frameworks expected soon.
- European Union: Awaiting final adoption of regulation, likely in Fall 2024.
- India: SEBI introduced a CRA Amendment and Master Circular in July 2023.
- Singapore & Hong Kong: Voluntary codes expected or recently published.
- Japan: A voluntary code was established by JFSA in December 2022.
Beyond Compliance: ESG’s Role in Business Efficiency
ESG ratings and data products serve a dual purpose: not only supporting companies in accessing capital but also in driving efficiency. These tools offer critical insights on risks, opportunities, and competitive positioning.
Related Article: 85% of Financial Institutions Leverage ESG Ratings Amid Global Push for Regulatory Alignment, CDP Report
When science-based and transparent, ESG ratings can guide companies and financial institutions in complying with mandatory disclosures while pushing capital towards sustainability targets like the Paris Agreement.