To what extent can government regulation bring clarity to ESG data?

As outlined in the UK Treasury’s report Greening Finance: A Roadmap to Sustainable Investing, the UK government is now considering regulating ESG rating providers, bringing them under the lens of the Financial Conduct Authority (FCA). The report highlights that ESG data providers offer assessments that “may not always be comparable”, and may include “more gaps and assumptions” than ratings in other areas of the market. The ultimate goal of the government review would be to increase the comparability of data, and avoid greenwashing that will mislead investors. In a similar vein, the Monetary Authority of Singapore (MAS) is taking a more hands-on approach to ESG transparency, by working with industry partners to develop platforms that will streamline the disclosure of ESG data, and organise the ratings and rankings ecosystem.

Governments do have an important role to play in ensuring ESG ratings and indices are transparent; ESG disclosure is increasingly relevant to investors and, as such, directly impacts the financing that is central to achieving the Paris Agreement and the SDGs. Government guidance may accelerate the standardisation of this evolving market, but convergence takes time and should not be rushed. Although we do not have time to spare in the shift to higher-quality and transparent ESG data, it is important to involve all stakeholders in this process. Any government mandate or push for comparability will steer investments and ultimately influence who become “winners and losers”.

It is especially relevant that the three components of ESG are taken into consideration, and that ESG data is not reduced to environmental metrics. Instead, governments should be using this as an opportunity to encourage companies to aim for a just transition, that considers the broader societal impact and good governance. This is another reason why all stakeholders, and all areas of companies, should be involved in the discussion.

The moves made by the UK and Singaporean governments are certainly steps in the right direction. However, their action is simply just that – a step in the right direction. Government regulation cannot take us all the way to the ultimate destination of ESG transparency. As ESG data aggregates a variety of components from the E, S and G, what will eventually ensure the credibility of ESG data and ratings, is robust disclosure frameworks that are validated and recognised by government regulators, experts and, crucially, practitioners.

Author: Andy Schottlaender