Under the new regulatory regime, ESG rating providers should meet certain standards and should never mislead investors through inaccurate or incomplete information. The primary activity subject to this new regulation involves the direct provision of an assessment of ESG factors to a user in the UK, where the assessment is used in relation to a specified investment in the RAO, unless there is the case of an exclusion.
According to ffnews.com, the scope of this new regulation is relatively broad, but it would potentially apply to ESG rating and data providers, including ESG consultancy or service providers. When compared to the current regime for benchmark administrators or credit rating agencies, the proposed regulatory regime is expected to be more punishing.
Representatives from a law company named Ashurst were cited by ffnews.com saying that regulation for data providers has been coming since early 2022. The consultation paper in question provides more detail on the subject, however. They also emphasised that regulators have cast a very wide net, which means that entities that operate as ESG consultancy or service providers will enter the scope of the new regulations.
According to theimpactinvestor.com, ESG (Environmental, Social, and Governance) Rating Agencies are organisations that examine a company’s environmental, social, and corporate governance policies to determine its sustainability. Universities, pension funds, social trading funds, and other institutional investors that are looking for long-term financial stability consider ESG ratings when making investment decisions.
An ESG rating agency is often hired by the company itself to perform an in-depth analysis of its practices, and then help it develop better policies. ESG rating providers are becoming increasingly popular among companies that want to achieve good publicity.
Rating providers generally address the company’s practices in 7 key areas, but they are not always limited to these. These areas include extractive industries or energy production, materials management, community relations or the rights of indigenous peoples, human rights or working conditions, customer relations, the company’s governance, and product responsibility that is usually related to waste management and hazardous substances.
Obtained ratings can be used by investors to analyse their portfolios and for businesses seeking information on how they are performing in terms of their sustainability practices.
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