Companies and corporate industry groups have called on the European Commission to increase scrutiny of the handling of controversies by ESG ratings providers.
In responses to a consultation on the regulation of ESG ratings in the EU, which closed this month, corporate entities expressed concerns about the use of controversy scores and their integration into wider ratings.
Introduced to flag potentially market-moving issues in a more timely manner than traditional ESG ratings, controversy scores are offered by leading ratings providers including MSCI, ISS ESG and Moody’s. They are typically based on a wide range of sources including media and social media, and have been increasingly integrated into ESG ratings.
Responding to the EC’s consultation, the European Roundtable for Industry called for controversy reports to be brought into the scope of EU ESG rating regulation.
Specifically, it urged policymakers to mandate greater transparency over rating agencies’ handling of controversies, including methodology, whether remediation measures are taken into account, the duration for which controversies impact scores and data sources.
The call for transparency was echoed by French business alliance Mouvement des Entreprises de France, which said in its response that the transparency regime should explicitly mention how controversies are taken into account in ratings.
The topic produced a particularly strong response from Germany. Deutsche Aktieninstitut, an industry body representing German listed companies, and DHL Group both raised concerns about the influence of controversy scores on investor allocations.
DHL Group claimed that the mere presence of controversies can deter investors and affect valuations, even if the issues have already been addressed. “A single controversy, irrespective of context, could result in exclusion from investment portfolios,” the firm said.
Deutsche Aktieninstitut also flagged the risk of portfolio exclusion for “even a single controversy”. Adding that it was of “high importance” for reports to be produced to the highest standards, the group called for controversy reports to be explicitly included in the scope of the regulation and for complaints to be handled with high priority.
It added that issuers should be able to interact with ratings providers to ensure a “fair and informed” evaluation.
Similarly, DHL argued that more standardisation and transparency is needed in relation to controversies. It called on ESMA to set out common principles and a baseline approach for rating companies in order to ensure that controversy reports are well-substantiated and grounded in evidence and facts.
Meanwhile the German Chemical Industry Association (VCI) raised concerns about the increasing weight given to controversies in ESG ratings, and also noted that the quality of inclusion of controversies varies greatly between providers.
It echoed calls for controversies to be explicitly included in the regulation and for firms to be able to have a dialogue with providers on the topic before any ratings are published.
The consultation attracted 68 public responses.