Late last year, the European Commission published the final rules for regulating ESG ratings providers in the EU.

These rules have now ‘entered into force’, although this is a rather misleading legal term - ratings firms like us will only have to comply from the ‘application date’, which is in July 2026.

So, we should have another 18 months of opaqueness, at least. 👎

The EU rules will share the same principles as the proposed UK ESG ratings regulation, aiming to:

🚫 Prohibit conflicts of interest

🔎 Enforce greater transparency of both ratings methodology and supporting information

📖 Open the process by which ESG ratings are set and reviewed to regulatory scrutiny

We at Integrum ESG will be in scope of this new regulation, and we are quite looking forward to seeing the light it will shine on our industry.

For example, if you scroll to Annex III on page 45, you will see that the regulation demands a set of “minimum disclosures to the public”.

The 8th disclosure required of “an aggregated ESG rating”, is “the weighting of the three overarching E, S and G categories of factors, and the explanation of the weighting method, including weight per individual E, S and G category.”

This new disclosure requirement shouldn’t be demanding right?

We for example, use the SASB/IFRS framework to determine which individual categories are material, and we weight each of them equally. If a client wants to override this, then can click on ‘customisation’ and do so. Simple.

But I have not yet met anyone who can tell me exactly how the largest legacy ESG ratings firms set their weightings.

When I say “exactly”, I mean explain how a precise % weighting is calculated, not offer a general approach statement like :

“The selection of Key Issues and their respective weights are readjusted on an annual basis, through a process that combines quantitative assessment of industry exposures to emerging issues and wide consultation with investment practitioners” (MSCI Ratings Methodology, November 2022) ❓

The importance of how one weights different categories (sustainability issues) is that it can influence the overall rating as much as how one scores each category.

Indeed, analyses of the disparity between the ESG ratings for the same company, from different ratings providers, suggest that very different category weights are a key reason. 

Consider the table below, which snapshots how MSCI weights the same “individual category” (in this case, employee health and safety) for three beverage sectors:

Perhaps health and safety at the Scotch distillery really is far more important than at the Irn Bru soda factory down the road, and it’s just us who doesn’t understand why. 🤷‍♂️

But we are looking forward to understanding why next year, when the ratings firm in question is forced to explain its weighting methodology.

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