CDP’s latest report on ESG ratings and data product providers reveals examples of ESG data shortcomings and certain product deficiencies. These include a lack of transparency in methodologies and difficulties in managing conflicts of interest.
The study adds that even the collection of ESG data itself is challenging, which can directly affect the quality of the product offering.
As the number of ESG data products and ratings has increased significantly in recent months, certain jurisdictions have tasked themselves with regulating the market.
For example, the FCA recently proposed to regulate ESG service providers with a code of conduct in an attempt to prevent greenwashing and improve the quality of available data.
ESMA is looking to do something similar, with plans to supervise the work of ESG rating providers as part of the European Commission’s sustainable finance package.
The report warns of the potential for regulatory divergence as jurisdictions come up with disparate ways to tackle these challenges. A misalignment of regulation could prevent the industry from achieving its core objective of tackling greenwashing.
Recommended actions resulting from the research revolve around the need for a unified global approach to sustainability regulation. This would encourage methodology transparency, good governance and jurisdictional interoperability.
A final suggestion includes using unified corporate sustainability disclosure standards for the implementation of mandatory disclosure requirements, as this would increase the amount of available comparable data.
CDP is one of the founding partners of SBTi, an organisation set on assisting financial institutions to meet their net-zero objectives. The Drawdown recently analysed the scientific credibility of the organisation’s chosen methodologies.