The world's major economies must do more to ensure that environmental, social and corporate governance-related ratings and investments are effective in the transition to a low-carbon economy, an OECD report revealed on Monday (04.10.2021).
The report, which was released ahead of a G20 meeting in October, is a response to the International Organization of Securities Commissions' opening of a consultation on ESG ratings in July and comes ahead of the next round of global climate talks in November.
The meaning of ESG It is as follows: the E in Environmental encompasses the effect that the activity of companies has on the environment, the S in Social includes the impact that a given company has on its social environment and the G in Governance refers to the corporate governance of the company. The report says that while the push to invest using ESG criteria could help international climate goals, "considerable challenges" must be overcome.
In particular, the report highlights the wide variety of approaches to assessing ESG issues, inconsistent data and lack of comparability between ESG rating methodologies.
“These competitive dynamics and challenges associated with ESG rating and investment could compromise market integrity, erode investor confidence and mask the extent of the environmental and climate impacts of investment decisions,” it said.
It also reveals: «Ultimately, challenges could limit the pace and scale of capital allocation needed to achieve tangible progress that supports long-term value and a transition to low-carbon economies.«.
The OECD called on governments to ensure transparency, overall comparability and quality of core ESG metrics.
Specifically on environmental ratings, the report notes that rating providers appear to place less importance on negative environmental impacts and more on corporate disclosure of policies and objectives, with little assessment of their impact.
As rating providers often use a large number of subcategory scores, the OECD called for greater clarity on the meaning of such scores to help investors, who are also held back by issues including “inadequate” data on policy clarity regarding carbon pricing and support for renewables, as well as a lack of measurement products and tools to enable them to align portfolios with specific climate goals.
Finally, the report concludes that, “overall, greater international cooperation is needed to ensure that ESG and climate transition-related practices progress in a way that improves current market fragmentation and strengthens investor confidence and market integrity.”
With information from Reuters
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