The tendency by ESG ratings to give a higher weight to corporate disclosure of policies, targets and objectives than to reductions in carbon emissions and intensity “raises questions on the extent to which companies will be able to implement a low-carbon transition”, the OECD has said.
According to the body, “methodologies will need to move from rewarding disclosure to rewarding alignment of company activities with sustainability”.
The warning concluded a new OECD report which examined the implementation of ESG approaches throughout the Asia Pacific region, published on Friday.
The OECD has also called on ESG data houses to foster “greater coordination” and develop “transparent” metrics, particularly with regards to changes in carbon emissions, carbon intensity, environmental R&D, use and investment in renewable energy. “The inconsistencies and lack of comparability of ESG ratings…raise questions about the extent to which current ESG metrics are fit for purpose and align with decision-useful information to investors,” it added.
The move by the OECD – which follows a 2020 report by the organisation saying ESG ratings “vary strongly depending on the provider chosen, which can occur for a number of reasons, such as different frameworks, measures, key indicators and metrics, data use, qualitative judgement, and weighting of subcategories” – adds momentum to the push to regulate the sector after longstanding concerns over a lack of transparency and potential conflicts of interest.
In November, global regulators proposed that the ESG ratings sector be placed under the remit of securities regulators to improve the comparability and reliability of ESG products after EU regulators noted that “oligopolies created by “large companies buying their way into the market” could “lead to significant consumer detriment including pricing above competitive levels, risk of collusion, entry carriers, and reduced innovation and efficiency”.
ESG ratings and data products providers are not generally subject to regulatory oversight, despite wielding enormous influence over investment allocation decisions as a result of the growing focus on sustainable inevstment.