ADVOCATUS RESEARCH

Navigating the Unregulated Status Quo

Environmental, Social and Governance (ESG) factors have risen to great prominence in the financial markets in recent years, with investors beginning to increasingly rely on these non-financial factors to frame their investment decisions. Indeed, during 2020, 65% of institutional investors reported using so-called ‘ESG ratings’ at least once per week, and ESG assets are now projected to reach $50 trillion globally by 2025. Given how crucial ESG ratings have therefore become in influencing asset allocation and capital flows, various governments and regulators around the world have turned their attention to considering the regulatory status of the firms supplying these ratings. The current absence of a regulatory framework has created numerous concerns, including fears that ratings providers rely on vastly different data sources, employ inconsistent methodologies, are subject to potential conflicts of interest and, ultimately, that the ratings they produce often diverge dramatically from one provider to another. Recognising these concerns, on 30 March 2023, HM Treasury (HMT) published a new consultation paper, welcoming views on whether regulation of ESG ratings providers should be introduced and on the potential scope of such a regulatory regime. In this two-part series, we will focus on the following areas:

• In Part 1, we will explore the features of ESG ratings products in greater detail, such as what they measure, who uses them and the challenges facing the market due to a lack of regulation thus far.
• In Part 2, we will examine the finer details of HMT’s proposals, before thereafter offering several points of guidance for companies actively looking to enhance their ESG ratings.

Read the full report here.