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July 19, 2023

Regulators must act to ‘right the wrongs’ of ESG ecosystem, says CDP

COP15, in Montreal 2022: The CDP report underlines the importance of ESG to support decision-making on global environmental agendas, such as the Paris Agreement, the Sustainable Development Goals and the Global Biodiversity Framework (Photo: Andrej Ivanov/AFP via Getty Images)
COP15, in Montreal 2022: The CDP report underlines the importance of ESG to support decision-making on global environmental agendas, such as the Paris Agreement, the Sustainable Development Goals and the Global Biodiversity Framework (Photo: Andrej Ivanov/AFP via Getty Images)

CDP calls for action to realign the ESG regulatory landscape, and proposes recommendations for regulators to ensure ESG can help deliver on international climate and environmental protection commitments.

Regulators must work quickly to right the “wrongs and misalignments” around environmental, social and governance ratings, says a report from non-profit organisation CDP, “Data for public good — Steering the role of ESG ratings and data products providers”.

According to CDP, the report is the first comprehensive analysis of the fragmented regulatory landscape surrounding ESG ratings and data products providers.

It is well known that ESG is an “increasingly contentious regulatory area”, as the report notes. Globally, in 2020, there were more than 40 ESG ratings, 150 ESG rankings and over 450 ESG indices, says CDP, quoting data from consultancy SustainServ. This creates a minefield for investors.

The report examines the shortcomings surrounding ESG and analyses how policymakers are addressing these issues worldwide. It also provides recommendations on how policymakers and regulators can improve the regulatory architecture of ESG ratings and data products.

CDP says that though in most major economies “ESG ratings are highly likely to be regulated”, it is nonetheless important to “focus on ensuring policies are developed and can drive sustainable investment in a way that does not create even more market confusion than already exists”.

The non-profit body adds: “This is a fast-evolving area, which means regulators have no time to lose in righting the current wrongs and misalignments.” It underlines the importance of ESG to support decision-making towards global environmental agendas, such as the Paris Agreement, the Sustainable Development Goals, and the Global Biodiversity Framework.

Included in the recommendations is the call for regulators to adopt mandatory disclosure requirements. “Making disclosure mandatory should address the data availability, while the use of harmonised and interoperable standards would address the issue of data comparability,” says CDP.

Regulators should also adopt a common baseline of definitions to define ESG ratings and data products, and avoid “confusion and contradiction” across policy initiatives, says the organisation.

They should also foster greater transparency around ESG methodologies by being more specific about the type and level of information that providers need to disclose, and implement good governance practice by requiring providers to identify, disclose, avoid and mitigate conflicts of interest, it says.

CDP highlights various recommendations on sustainability-related practices from the International Organization of Securities Commissions as showing the way forward for regulators.

You can read the full report here.

A service from the Financial Times