The world’s largest investor, Norges Bank Investment Management (NBIM), has called for improved transparency and governance when it comes to ESG ratings.
NBIM acknowledges that although ESG ratings play a critical role in guiding investment decisions, risk monitoring and stewardship activities, a lack of disclosure regarding methodology, data sources and estimation surrounding the rating can be off-putting.
‘We are a user of ESG ratings and have an interest in a well-functioning global ESG data market. As an investor, we need information on companies’ exposure to sustainability risks and opportunities, how these are managed and relevant performance metrics,’ NBIM says.
However, the approach taken by rating providers is often not apparent to stakeholders, particularly investors that buy ESG investment products, the sovereign wealth fund claims: ‘This can cause market participants to misinterpret ESG ratings, which in turn may lead them to incorrectly price financial instruments or create products that do not meet the expectations of customers.’
ESG ratings are widely used in the market to help steer investment strategies and products, yet they should not be the only tool used, NBIM explains. The bank says it doesn’t use individual ESG ratings directly to make decisions on investments, risk management or voting but does use them in combination with other information to make informed judgments.
The need for more disclosure in ESG ratings has been a topic of discussion for some time, with the European Council on the pathway to setting new regulations governing ESG ratings for companies listed and investment products sold in the EU. The council announced in June 2023 that it would begin the process of regulating ESG ratings to help boost investor confidence in their sustainable holdings.
The newly introduced regulations are designed to enhance the dependability and comparability of ESG ratings. Lawmakers hope this will be achieved by bolstering the transparency of operations carried out by ESG ratings providers, which ultimately will help ensure a higher level of comparability and mitigate the risk of conflicts of interest.
‘Better transparency around ESG ratings could enhance pricing efficiency and [promote] well-functioning markets. We welcome steps toward regulation and encourage harmonization of policy initiatives,’ NBIM states.
