The UK Chancellor's recent announcement of stricter regulations for ESG rating agencies marks a significant development in the corporate landscape. This follows the EU's recent adoption of “Regulation on the Transparency and Integrity of Environmental, Social and Governance (ESG) Rating Activities” or “ESGR”. Both the UK and EU hope this will increase the consistency and transparency of ESG ratings. The loss of confidence in (financial) rating agencies was a major repercussion of the 2008 financial crisis due to their failure to identify subprime securities: this regulation intends to ensure agencies remain an independent arbiter to bolster investor confidence in ESG-related ratings. It also presents an opportunity for businesses to better identify areas for improvement and make more informed decisions about their sustainability strategies.
The EU is expected to become live in 2026 and the UK not far behind.
For companies, this new regulation means a more level playing field. Previously, variations in methodologies and data sources could lead to wildly different ratings for the same company. This inconsistency often left investors confused and made it difficult for businesses to accurately assess their ESG performance.
This new regulation aims to address this issue by:
- Enhancing transparency: Providing companies with a clearer understanding of how rating agencies assess their ESG performance.
- Improving consistency: Establishing a more standardised approach to risk disclosure, leading to more reliable and comparable ratings.
- Driving insight: Facilitating a more nuanced understanding of ESG risks and opportunities, beyond simple grading.
By gaining a deeper understanding of their own data and the methodologies used by rating agencies, companies can better manage ESG risks and identify opportunities for improvement.
Should you wish to discuss the potential implications of these changes, please do not hesitate to contact us.
