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How regulation is shaping the future of ESG ratings and sustainable investments

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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 IMD or enjoy below:

🗞️ Driving the news: A transformative wave of financial reporting regulations is reshaping the landscape of ESG (Environmental, Social, and Governance) ratings, challenging companies to move beyond superficial commitments
The introduction of the Corporate Sustainability Reporting Directive (CSRD), the Sustainable Finance Disclosure Regulation (SFDR), and the EU Taxonomy for sustainable activities marks a significant shift towards accountability and genuine sustainability in corporate practices

🔭 The context: The lack of standardized sustainability guidelines and stringent reporting regulations has historically allowed companies to secure favorable ESG ratings without rigorous scrutiny
This inconsistency has led to challenges for investors focused on sustainability, as well as confusion due to varying evaluations from different rating providers

🌍 Why it matters for the planet: The new regulations aim to improve the comparability, credibility, and accessibility of ESG information, making it easier for investors to make informed decisions
By emphasizing genuine sustainability actions over mere appearances, these regulations support the global effort to combat climate change and foster a more sustainable economic system

⏭️ What's next: The regulatory changes require companies, rating agencies, and investors to adapt
Companies must acquire the right expertise to understand and navigate the new landscape
Rating agencies face stricter regulation and the need for greater transparency in their methodologies
Investors will need to shift their focus beyond financial returns to include environmental objectives, aligning with the broader goals of the EU Green Deal

📈 One stat: Publicly traded companies currently spend between $220,000 and $480,000 annually on ESG ratings and related services, highlighting the economic significance of these ratings in the corporate world

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