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ESG ratings: whose interests do they serve?

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By illuminem briefings

· 2 min read

illuminem summarizes for you the essential news of the day. Read the full piece on the Financial Times or enjoy below

🗞️ Driving the news: Despite their popularity, the integrity and transparency of ESG (Environmental, Social, and Governance) ratings are under scrutiny
• The European Union (EU) underscores how ESG data giants face three conflicts of interest: selling ratings and data to the same investor clients, selling consultancy services to help companies improve ratings, and selling their own ratings for display on financial products
• Furthermore, ESG ratings do not actually measure corporate performance on carbon emissions or pollution, but how well a company is managing environmental, social, and governance risks to their own bottom line

🔭 The context: ESG ratings play a pivotal role in dictating the sustainable credential of companies and which stocks and bonds make it into the $2.8tn of investment funds that are marketed as sustainable
• However, unlike traditional credit ratings, ESG ratings largely remain unregulated and rely on unaudited data

🌍 Why it matters for the planet: The credibility and transparency of ESG ratings are critical due to the impact they have on the vast sustainable funds market
• If unchecked, there could be misleading implications for sustainable investment and the broader mission to combat climate change

⏭️ What's next: European lawmakers are set to debate a law requiring more transparency from ESG rating agencies
• Similar actions can be seen in Asia and the US, which might reshape the industry to focus on the credibility and clarity of ratings

💬 One quote: “There is disillusion and confusion when people realize the labels mean very little or do not measure what they want them to measure,” (Fabiola Schneider, Dublin City University)

📈 One stat: Only 5% of all passive funds try to help meet the goals of the Paris climate agreement to limit global warming to 1.5C

Click for more news covering the latest on sustainable finance

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