FMSB Seeks Greater ESG Transparency in New Paper
Posted by Colin Lambert. Last updated: July 20, 2022
The Financial Markets Standards Board (FMSB) has published its latest Spotlight Review, examining ESG ratings methodologies and data collection processes.
FMSB says the rapidly growing market for ESG-related products and the desire of financial institutions to manage their exposure to ESG-related risks has heightened the importance of, and demand for, ESG ratings. It adds ESG ratings assist the development of a healthy market ecosystem by providing an additional and external source of due diligence and expertise, however, their prominence also means that ESG ratings have real impacts on issuers and investors.
The Spotlight Review seeks to facilitate greater transparency of ESG ratings methodologies and data collection processes to enhance understanding of ESG ratings and facilitate comparability across ratings providers in wholesale financial markets. It builds on an existing body of work produced by regulators, standard-setters and industry participants and focuses on issues in four key areas: output/objectives of ESG ratings; data inputs; methodology; and the post-assessment rating process.
The FMSB paper highlights the varied use cases of ESG ratings and issues associated with limited transparency and market understanding of ratings. It also looks at the different objectives of rating products and the diversity between products with similar objectives.
Further themes are the impact of controversies on an issuer’s ESG rating, which FMSB says can be material but are little understood. It adds that efforts to increase issuer ESG disclosure are likely to improve the quality of ESG ratings, arguing that greater transparency helps to drive market solutions independent of regulation.
“ESG ratings are an important tool for investors when making investment decisions related to managing exposure to ESG-related risks,” says Myles McGuinness, CEO of FMSB. “We hope that this Spotlight Review can help to support increased transparency around collection processes and methodologies as a means of facilitating comparability of ESG ratings.”
Caroline Haas, chair of the FMSB ESG Ratings Working Group and head of climate and ESG capital markets at NatWest Markets, adds, “Improved disclosure and transparency are key for market participants to understand the significance of different ratings in a diverse landscape. This Review seeks to increase the transparency of ESG ratings methodologies and data collection processes to promote user understanding, aid comparability across providers, improve trust in ratings and thereby support informed allocation of capital.”