KBRA releases commentary that details challenges with environmental, social, and governance (ESG) ratings in their current form that have been cited by both regulators and investors.

The European Securities and Markets Authority (ESMA) issued a “call for evidence” on February 3 as it begins a formal review of the ESG ratings market in the European Union (EU). Additionally, the U.S. Securities and Exchange Commission (SEC) recently released a staff report detailing potential market risks arising from nationally recognized statistical rating organizations (NRSRO) that also provide ESG scores. ESMA, the SEC, and the UK Financial Conduct Authority (FCA), as well as other global financial regulators, have increasingly been eyeing regulation of the ESG ratings market, highlighting the challenges and potential conflicts of interest involved with ESG scoring systems.

In its analysis of ESG considerations, KBRA focuses on whether ESG factors influence the risk of default and, where relevant, how an issuer actively manages the ESG risks and opportunities its entity faces. KBRA does not offer ESG ratings, a decision that was heavily influenced by extensive investor feedback and discussions with relevant regulatory bodies. Investors desire access to better quality and more consistent ESG data; however, KBRA believes that ESG ratings in their current form are doing more harm to the market than good.

Click here to view the report.

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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