July 27th, 2022

On June 7, Marilyn Waite of Climate Finance Fund, Daniel Cash of The Credit Rating Research Initiative, and Senior Fellow Bill Harrington proposed a seven-point plan for improving ESG ratings to the European Union. Waite, Cash, and Harrington delivered the ESG proposal in a comment response to a European Commission public consultation on ESG ratings and ESG factors in credit ratings. The European Commission is the executive of the European Union.

Waite, Cash, and Harrington assert that users and regulators of ESG ratings must allow ratings to develop organically based on utility.

 “The range of ESG ratings reflects a range of legitimate assessments of ESG factors, which means that all investors, including retail investors, must themselves navigate ESG viewpoint diversity for the foreseeable future.”

To foster useful ESG ratings, regulators should learn from and avoid their grievously harmful approach to credit rating regulation. Importantly, regulators must foster ESG rating competition by setting up useful safeguards that minimize provider conflict-of-interest and maximize user comprehension.

ESG ratings should “inform a series of minimum safeguards that ensure this emerging industry can develop in a way that encourages competition and a proliferation of useful perspectives on ESG, while protecting against issues arising from a lack of comparability, methodological rigor, and conflicts of interest as observed in the case of credit rating companies and their governing bodies.”

Equally importantly, regulators must not stymy ESG rating competition by endorsing or otherwise favoring an ESG rating provider or group of providers.

The nascent ESG rating system “is vulnerable to a range of issues and failures of governance that have affected, for example, the much older credit rating company system.”

Waite, Cash, and Harrington summarized their proposal in The Hill opinion “The Wild West of regulating ESG investments” of July 12.

“There are two critical ways forward to achieve trust, competition and clarity for ESG ratings: banning the sale of ancillary services for ESG rating providers and requiring transparency for methodologies and conflicts.”

Last December, Daniel Cash joined Gillian Marcelle, Chantal Naidoo, and Bill Harrington in the Croatan Conversation “ESG Assessments: Helpful, Harmful, or Irrelevant?”

Bill lives in Fort Lauderdale, Florida. To learn more about Bill and his ten-year, to-date self-funded research advocacy, please see his bio.