Chancellor announces plans for new legislation for ESG ratings providers

Commenting on the Chancellor’s announcement on plans for new legislation for ESG ratings providers Simon Jones, Head of Responsible Investment, Hymans Robertson says:

“External ESG ratings are a simple and effective tool for communicating assessments on companies and investment portfolios, but there are issues in how they have been perceived. Whilst ESG ratings typically reflect the internal management of ESG risks, they are often conflated with providing an assessment of the external impact that a company may have. Coupled with the fact that there are often discrepancies in ratings produced by different agencies, this can create a lack of trust.

“Although there are products that make direct use of ESG ratings as a basis for capital allocation, we believe its is the underlying data which is used as an input to the ratings process that is more valuable. Product providers are increasingly creating their own bespoke methodologies which draw on multiple insights and data sources to develop investment products, rather than simply relying on the output from a single agency. Regulation of ESG ratings providers will be helpful if it promotes transparency and consistency or approaches. However, we would not want to see this regulation extended to those using ESG data solely for the purposes of creating investment products.”