With 94% of investors relying on ESG ratings at least monthly, the significance of these tools has soared, according to a report from CDP.
According to ESG News, despite widespread usage, the integrity and consistency of ESG ratings remain points of contention. As countries begin implementing voluntary codes and more stringent regulations, CDP is actively engaging with policymakers to enhance the impact of these tools and prevent fragmentation across different jurisdictions.
The “Data for Public Good” report by CDP underscores considerable discrepancies in how ESG data is collected, rated, and benchmarked. One of the most pressing challenges is the lack of uniformity in objectives and methodologies, which varies significantly across regions. This regulatory fragmentation could potentially confuse market participants and impede the transparency and trust that policymakers aim to establish in regulating the market.
Globally, jurisdictions are at different stages of rolling out ESG-related regulations. The United Kingdom has introduced a voluntary, industry-led code of conduct, with expectations of new regulatory frameworks in the near future. The European Union is poised for the final adoption of its regulations, anticipated in Fall 2024. In Asia, the Securities and Exchange Board of India (SEBI) launched a CRA Amendment and Master Circular in July 2023, while Singapore and Hong Kong have recently published or are expecting voluntary codes. Additionally, Japan established a voluntary code as recently as December 2022.
Beyond mere compliance, ESG ratings and data serve a dual role, supporting companies in securing capital and enhancing business efficiency. These tools provide vital insights into risks, opportunities, and competitive positioning. When founded on scientific principles and maintained transparently, ESG ratings can assist companies and financial institutions in meeting mandatory disclosure requirements and directing investments towards sustainable objectives like those outlined in the Paris Agreement.
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