History Repeating Itself?
In the aftermath of the Global Financial Crisis, credit rating agencies were among those singled out for punishment – in the form of a tightened regulatory regime with civil liability towards investors, as opposed to being a helpful conduit protected by, among others, the First Amendment (Free Speech). What is easy to forget is the comfortable situation of ‘ratings addiction’ many investors as well as regulators allowed themselves to be lulled into. Anyone remember that capital requirements were in some situations linked to the whims of credit rating agencies?
Well, history seems to be repeating itself. A plethora of ESG ratings and assessment tools has crowded the market in the past few years. Just as with credit, their methodologies and assumptions differ quite a bit, with tens or hundreds of points calculated with AI or questionnaires. But investors’ mandates are at times linked to these results…
“Are we waiting for the first wave of litigation against these ESG agencies?”
ESG rating agencies are operating in a similar power vacuum, without anything comparable to the regulation for credit rating agencies. Are we waiting for the first wave of litigation against these ESG agencies? Or is it time to address this regulation? The European Securities and Markets Authority (ESMA) has taken on the challenge and written to the EC to plug the gap. Will others too?
Sustainable Finance Strategy
It’s not too late to learn from history. Surely the regulation of ESG rating agencies is part and parcel of a sustainable finance strategy.