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Sustainable Business

Best Bets for Environmental, Social and Governance (ESG) Ratings

"On February 18, 2021, Representative Juan Vargas introduced H.R. 1187, the ESG Disclosure Simplification Act of 2021, which would require [company] issuers to disclose to shareholders certain environmental, social, and governance (ESG) metrics, the connection between those metrics and the issuer's long term business strategy, and the method by which the issuer determines how ESG metrics affect its long term strategy." In April 2022, further guidance was introduced via H.R. 1028. Additional information regarding the ongoing conversation around "Climate Change Risk Disclosures and the SEC" is available via the February 2022 CRS report.

On May 25, 2022, citing concerns over lack of consistent, comparable, and reliable investor disclosures regarding environmental, social, and governance (ESG) fund and ESG investment adviser strategies, the Securities and Exchange Commission (SEC) voted 3-1 to issue amendments to regulations implementing the Investment Advisers Act of 1940 (P.L. 76-768) and the Investment Company Act of 1940 (P.L. 76-768) aimed at addressing such perceived inadequacies. The proposal is broadly portrayed as seeking to address “greenwashing”—when a fund overstates the ESG attributes of its investments. Read more in the October 2022 CRS Report.

The SEC was expected to issue a final rule in October 2022

October Update: The SEC is still months away from finalizing expansive new climate disclosure requirements. The SEC will miss a self-imposed October deadline for final rules as it continues to sift through thousands of public comments and factors in a June Supreme Court ruling that endangers the agency’s normally broad authority to regulate Wall Street.

Read the current 490-page proposal here: The Enhancement and Standardization of Climate-Related Disclosures for Investors.

Important: ESG reporting is still in its infancy. There are currently over 100 sustainability-related ratings, rankings and awards. Each of these has its origin in a different set of circumstances and each ranking owner has their own agenda. Specifically measuring ESG performance is challenging, attention to the underlying data is essential, and ESG ratings and metrics should be carefully considered for each application/industry.

Consider this: ESG raters are paid by the investors who use the ratings, not by the companies that are rated. "Rating agencies also show a clear bias favoring developed markets outside of the US."

Five of the prominent ESG rating agencies include: Sustainalytics, Moody's ESG (Vigeo-Eiris), S&P Global (RobecoSAM), Refinitiv (Asset4), and MSCI (KLD). For a helpful comparison of ESG across business database solutions, visit Edward Lim's comparison chart. For more on the ABC's of ESG Frameworks visit the ESG navigator or investigate the standards tab in this guide.