French business groups call for ESG ratings agency code of conduct

An evaluation of non-financial ratings firms finds unsatisfactory performance

A coalition of French business associations, including the French Business Confederation, has called on the European Commission to require non-financial rating agencies such as Vigeo Eiris, Sustainalytics, MSCI and others to adopt a code of conduct and legally impose minimum transparency requirements on them.

The call comes in an evaluation of the agencies by French listed companies that finds their performance overall is unsatisfactory.

The research saw 58 French listed companies assess the performance of eight ratings agencies: EcoVadis; CDP; FTSE4Good Index; MSCI; ISS-oekom; RobecoSAM (DJSI Index), Sustainalytics and Vigeo Eiris.

Companies only evaluated non-financial rating agencies they have relationships with on five subjects: governance; methodology; relationship with companies; handling of controversies; and overall appreciation.

Among the five subjects of the survey, “methodology” and “handling of controversies” were the most poorly rated (unsatisfactory). On average, “governance” was the highest-rated subject (satisfactory).

Overall the total score for all the agencies was just 2.78 out of four (unsatisfactory).

The survey also highlights key strengths and main areas for improvement for each individual rating agency based on company feedback. Common key strengths cited were name recognition (‘notoriety’), good use by investors and transparency on the methodology.

One area for potential improvement was less time-consuming questionnaires.The survey also recommends rating agencies publish their detailed methodologies and give companies, free of charge, their detailed ratings.

Also recommended is for rating agencies to consider national legal, regulatory and market situations in their assessments and make public criteria that leads to a controversy being taken into account for a company rating.

Also, recommendations are aimed at the European Commission, in the context of its work on the Action Plan on Sustainable Finance.

The European Commission is asked to require non-financial rating agencies to adopt a code of conduct on a “comply or explain” basis. And the European Commission is called on to adopt a European legal framework imposing minimum transparency requirements on non-financial rating agencies in areas including information sources and methodology.

It comes as mainstream credit rating agencies are coming under scrutiny from the European Commission, which is undertaking a study on sustainability ratings and research.

The French Business Confederation (Medef), the Association of Large French Companies (Afep), French Association of Investor Relations (Cliff) and French Association of Sustainable Development and CSR Directors (C3D) partnered on the research, which they call the first step in their work on the area.