Legal & Regulatory News

​Financial Markets Standards Board publishes spotlight review on ESG ratings

20 July 2022

On 20 July 2022, the Financial Markets Standards Board published a spotlight review on external ESG issuer rating methodologies for companies produced by third party commercial ESG rating providers.

The review acknowledges that a balance must be struck between rating providers maintaining confidentiality of their data collection tools and proprietary methodologies while providing sufficient transparency to support fair and effective ESG markets. The review identifies, amongst other things, a number of issues relating to ESG ratings, predominantly around market understanding and disclosures, including the following:

  • limitations in user understanding of the objectives of ESG ratings and the measurements/outcomes (including whether ratings are risk-based or assess “double materiality”);
  • limited transparency and comparability of ESG methodologies (including the role of controversies, manageable versus unmanageable risk and how data gaps are treated);
  • lack of robustness and quality of underlying data informing ratings, compounded by issues with limited or inconsistent corporate disclosure;
  • limitations in the engagement process between rating providers and rated entities (particularly in the context of correcting inaccuracies or disparities in the ratings); and
  • limited transparency around ratings being solicited or unsolicited.

Click here to read the full spotlight review.