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ESG ratings’ big dogs may need to learn new tricks

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Aerial view of Gabonese rainforest, in Arboretum Raponda Walker, Gabon, October 11, 2021. Picture taken with a drone. REUTERS/Christophe Van Der Perre

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LONDON, Nov 23 (Reuters Breakingviews) - Providers of environmental, social and governance ratings are on notice. The International Organization of Securities Commissions on Tuesday said oversight of what has long been a notoriously opaque sector needs to improve. It’s not an immediate problem for big players like S&P Global (SPGI.N), MSCI (MSCI.N) and Moody’s (MCO.N), but still highlights a more serious medium-term threat.

IOSCO’s 56-page report ostensibly contains little to fret about. The global standards-setter wants the ESG ratings bestowed on companies to be more transparent in their data and the methodology used to spit out a grade. That may help explain how a company like Tesla (TSLA.O), for example, could be given wildly different ratings by three different providers. Still, IOSCO only sets broad recommendations: domestic regulators decide the detail.

What’s less in doubt is that the market is booming. IOSCO cites research stating that annual spending on ESG data is growing at a 20% clip and could hit $1 billion this year, as asset managers try to ensure they are investing sustainably. It is also becoming more concentrated: since 2019, S&P Global has acquired the ratings business of Switzerland’s RobecoSAM, Moody’s has bought France’s Vigeo Eiris, MSCI has snapped up Carbon Delta and Morningstar (MORN.O) now owns all of the Netherlands’ Sustainalytics.

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Yet membership of this exclusive club may not stay valuable. Right now, ESG-keen investors find it difficult to access decent data on greenhouse gas emissions and other ESG metrics because companies themselves may not know or disclose it. Subscribing to ratings or data sets from the big players makes life easier.

That could change. IOSCO’s calls for more transparency are part of a broader shift. The UK government said before COP26 that UK companies would in 2022 have to reveal climate data read more . The Glasgow conference also saw the launch of the new International Sustainability Standards Board (ISSB), which will issue guidelines for carbon disclosures. And so-called open-source platforms like OS-Climate will help clean data and make it more freely available to asset managers.

In an ideal world, meaningful climate data would be public and there would be little need for rating firms to interpret it. That won’t happen overnight. And even if it materialises, ESG bigwigs can still make money by advising companies on how to ensure their disclosures satisfy both the ISSB and the European Union, which has its own reporting standard for funds. But that may mean a smaller, less lucrative market.

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CONTEXT NEWS

- The International Organization of Securities Commissions on Nov. 23 announced a series of recommendations to improve the regulation of providers of environmental, social and governance ratings.

- IOSCO, which groups securities watchdogs from the United States, Europe, Asia and Latin America, published 10 recommendations for its members to apply in day-to-day work.

- Asset managers use ratings from about 160 raters, such as MSCI, S&P Global and Morningstar, to pick stocks and bonds for “green” products now popular with ethical investors, but there are no regulatory checks on how those ratings were put together.

- IOSCO said its recommendations will begin shining a light on how ratings are compiled and conflicts of interest handled in a largely unregulated business which is already worth around $1 billion and growing at 20% a year.

- Earlier this month a new global body was set up to introduce rigour into how companies make ESG-related disclosures. Until now, asset managers have relied heavily on ratings in the absence of high-quality company disclosures.

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Editing by Neil Unmack and Oliver Taslic

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