The European Union discussed a new regulatory regime for ESG ratings providers. The proposed regulation would create a mandatory registration and disclosure system for ESG ratings providers, with the goal of improving transparency and standardization in the ratings process. Although the proposed regulation is still in the consultation phase, it is a promising step towards ESG transparency on a wider scale.
How many times have you seen the phrase “ESG” in your news as of late? If you’re anything like us and keeping up with the financial world, probably too many times to count. The phrase “ESG” is thrown around in countless articles as businesses and governments try to communicate their efforts in Environmental, Social, and Governance issues. ESG ratings are meant to provide insight into a company’s social impact and guidance towards how businesses can improve their investment and company practices. While the “E” in ESG often receives the spotlight in headlines, the term also encompasses companies’ shareholder, employee, and owner rights. The rise of ESG marks how the global concern over climate change and social justice issues have finally reached mainstream finance.
ESG is a great shift in the public conscious. We can’t begin to solve pressing global issues without recognizing them in the first place. However, it is naturally difficult to standardize ratings for business practices from cradle to grave. Even as ESG investments grow more popular, consensus on ESG standards are mixed at best, and we lack a prominent rating system.
Progress has been made in standardizing ESG scores, however. Recently, the European Union discussed a new regulatory regime for ESG ratings providers. The proposed regulation would create a mandatory registration and disclosure system for ESG ratings providers, with the goal of improving transparency and standardization in the ratings process. The regulation would apply to ESG rating providers operating in the EU or provide ratings for companies operating in the EU. The new EU regulation would, therefore, create a job market for professional ESG rating providers, who would have to receive approval from the European Securities and Markets Authority. Although the proposed regulation is still in the consultation phase, it is a promising step towards ESG transparency on a wider scale.
India, Japan, and the UK also have ESG rating and requirement initiatives. The Japan Financial Services Agency (JFSA) adopted the IOSCO standard through a “comply or explain” code in December 2022. The Securities and Exchange Board of India (SEBI) launched its consultation to formally regulate ESG ratings. The regime is expected to impact ESG ratings on Indian public companies by requiring them to meet specific parameters in the rating. The UK HM Treasury (HMT) consultation introduced a new regulated activity for ESG ratings providers, and the EU proposal articulates a detailed new regulatory licensing and ongoing compliance regime for ESG ratings providers.
If Europe and other global economies do adopt ESG standards and ratings, businesses and banks will have to start to clean up their practices. For companies, a uniform rating makes it possible to highlight their achievements, compared to other companies in the sector, as objectively as possible. The introduction of ESG rating requirements would also reward companies who already manage and pay attention to the impact their business has on the Earth and to its employees.
To prepare to be rated, while it depends on the rating agency, there are still some general steps you can take which are helpful. Data collection and organization is essential. First of all to understand your business practices and establish a baseline for your companies emissions and impacts. Then, it becomes easier to show improvement to rating providers. Data should be collected so that it is easy to audit, just as official accounting statements are collected.
<aside> 💡 Vert uses GHG Protocol principles and official emissions factors databases for calculating company’s Carbon Footprint, including Scope 3. That ensures that these calculations are suitable for every reporting frameworks.
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Similarly, banks will also be rewarded if they get ahead of ESG regulations, an incentive to give out more green loans for sustainable practices. The pressure placed on the banking industry to meet the changing demands may make loan terms more favorable for businesses looking to improve their ESG ratings. Vert’s platform is the perfect place for banks to better understand and provide green loans for SMBs.
We know the rise of ESG can be daunting, but Vert is here to make the transition to a carbon free future easier. Not only do our reporting frameworks help with small businesses, but also the banks and ESG raters that must interpret company data. We are ready and excited for more updates on ESG ratings, and to be your go-to, whether bank or business, for supporting stellar ESG scores.