Sustainability Gatekeepers: ESG Ratings and Data Providers

Abstract

Sustainability and Environmental, Social, and Governance (ESG) indicators have become a prominent topic for policymakers, corporations, and financial institutions, and led to the emergence of a new paradigm, sustainable finance. However, sustainable finance still lacks effective gatekeepers—whom this Article labels “Sustainability Gatekeepers”— contributing to investor protection and systemic risk mitigation. Among Sustainability Gatekeepers, this Article focuses on ESG ratings and data providers, as they are increasingly influential in the economic and financial landscape although they present unsolved issues. The lack of standardization at the level of ESG indicators and the multiple methodologies that the different ESG ratings and data providers have elaborated raise doubts and concerns. Furthermore, their business activities could be a source of significant conflicts of interest. These problems share relevant similarities with some of the issues that emerged in the credit rating industry. After providing a brief background analysis of traditional gatekeepers, in particular credit ratings and credit rating agencies and their regulation, this Article considers Sustainability Gatekeepers and identifies some key features of ESG ratings, in comparison to credit ratings. Furthermore, this Article provides a review of the most popular ESG data providers and related investable indices, with an analysis of their key performance statistics. In light of these results, this Article advances some policy options to improve transparency, standardization, and alignment with climate change policies to ensure a full implementation of sustainable practices within the financial industry.

Keywords: ESG, ESG Ratings, Credit Ratings, Sustainability, investor protection, systemic risk, financial crisis