Regulators calling for rethink of how ESG ratings system works; An estimated 600-plus standards, rankings, frameworks exist
Vladimir Putin’s invasion of Ukraine is shining a spotlight on the
largely unregulated business of ESG ratings, after investments billed as
socially conscious bought into a regime that’s now being accused of war
crimes.
On the eve of the invasion, about $9.5 billion in funds
meeting European environmental, social or governance standards were in
Russia, often on the basis of ratings from companies such as Sustainalytics and MSCI Inc.
While ESG raters weren’t alone in misjudging
Russia’s belligerence, their exposure is particularly awkward given
their analysts are paid to focus on factors such as democracy, human
rights and other social and governance factors. Regulators are now
calling for urgent work to clarify the myriad standards and practices
being used to produce such ratings.
“We need to do some kind of rethinking here,”
said Erik Thedeen, chairman of the Sustainable Finance Task Force at the
International Organization of Securities Commissions, in an interview.
“This disastrous war is an eye opener. The whole ESG community needs to
think through how to handle state-owned companies” in countries that
violate human rights. ...
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