On the Responsibility of Rating Agencies to Tell the Truth

"I have heard that some rating agencies are withdrawing their ESG ratings on a quantitative basis. Well, then they are returning more or less to their traditional old rating model, which has been proven to have played a very inglorious role in the financial crisis. Progress looks different when it comes to real future problems of humanity and comprehensive transparency of companies as well as states. The return to largely financial and already difficult to understand ratings within a 20-level rating scale (and within which it is easy to hide) will not meet the needs of modern investors.

Transparency means trust and should be an essential strategic pillar for any company or government. In times of so many crises, how can you provide a comprehensive, transparent picture for stakeholders if you don't include ESG and its evaluation?

This is all the more true as the United Nations and other global organizations are setting standards and states and companies alike are making significant ESG efforts.

In a world of increasing ESG transparency demands, especially from the younger population - supported by internet and social media - rating agencies that additionally offer ESG ratings will be able to provide a more comprehensive picture and thus have a clear competitive advantage! Correctly, modern central banks - such as the ECB - require banks to provide ESG risk information for their lending. How can a rating agency provide a comprehensive rating if it no longer analyzes ESG risks quantitatively? By taking such a step backwards, the agencies are once again harming themselves and should rethink their old economy business model. Otherwise, they are obviously very afraid - some say also as a result of political pressure - to tell the truth to their clients such as companies and sovereigns that demand (and have to pay for) such ratings, which in a way is a conflict of interest anyway. This is not in the interest of capital markets and necessary higher transparency. There is a risk that without this information, rating agencies may promote companies with dubious reputations or banana republics."

 

Chairman OVFA (Austrian Association for Financial Analysis and Asset Management, www.ovfa.at)Deputy Chairman EFFAS (The European Federation of Financial Analysts Societies, www.effas.com)Photo credit: Erste Group Bank AG.