Companies are increasingly making claims about their environmental and social performance as a way to attract investments and increase the perception of their brand vis à vis external stakeholders. In this context, ESG ratings – by aggregating a variety of entry points into a single score – provide actionable data to investors and financial institutions, guiding them in their investment decisions.
However, the lack of transparency on characteristics and methodologies of ESG ratings exposes the financial market to “greenwashing” and erodes the trust in a tool that could strongly contribute to boosting sustainable investments.
The proposal for a Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities (ESG Rating Proposal) addresses some of the existing issues regarding the reliability, comparability and transparency of ESG ratings by introducing disclosure requirements for the methodologies, models and key rating assumptions used by ESG rating providers in their activities. The ECON draft report further strengthens these disclosure obligations, requiring that the rating product explicitly discloses whether it considers the effects of business activities on the people and the planet (‘impact materiality’).