10 June 2022

OECD: ESG RATINGS AND CLIMATE TRANSITION

Foreword

The accelerating threat of climate change raises the urgency of the global commitment to climate transition,including the important role of financial markets in aligning investment with net zero objectives. As a result,this has attracted the attention of investors, policy makers, and civil society stakeholders, and has been afactor in the growth of sustainable finance and tailored financial products.

In particular, ESG investing, which generally refers to the process of incorporating environmental, social
and governance (ESG) factors into asset allocation and risk decisions, so as to generate sustainable, long-term financial returns, has become a leading form of sustainable finance due to its perceived potential todeliver financial returns, align with societal values, and contribute to sustainability and climate-relatedobjectives.

As market participants show greater awareness and concern of the physical and climate transition risks
that may affect financial stability and market efficiency, ESG rating providers and investment funds are
increasingly integrating metrics aligned with environmental impact, climate risk mitigation, and strategies toward greater use of renewable energy, innovations and products in their business activities.

For this reason, the environmental ‘E’ pillar score of ESG rating has become an important component of
ESG investing, as the ‘E’ pillar is being increasingly used as a proxy for asset selection aligned with a low-carbon transition. It is therefore critical to understand the extent to which the environmental ‘E’ pillar of ESG ratings reflects carbon emission reduction, efficient resource use and investment to support
renewables, allowing market participants to make informed decisions relating to supporting an orderly
transition to low-carbon economies.

There is growing recognition that better quality data and reporting will be needed to provide globally
consistent and verifiable information by which to assess the progress of companies’ transitions, and to
incorporate results into capital allocation processes. Forward-looking metrics such as climate related
corporate policies and targets will be integral to the transition, however the inclusion of such metrics in Epillar scores is currently hampered by a lack of verification.

Building on existing OECD research on ESG rating and investing, this report assesses the extent to which the climate-related information and metrics used to compile E pillar scores aligns with actions to lower greenhouse gas emission and emission intensity to support the transition of activities and operations to renewable and low-carbon alternatives.

This document was approved by the Committee on Financial Markets on June 2022 and was prepared for publication by the OECD Secretariat...

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