ESG Ratings: New Regulation – GMO insights

Commenting on this week’s news that the Council and European Parliament reached a provisional agreement on a proposal for a regulation on environmental, social and governance (ESG) rating activities, which aims to boost investor confidence in sustainable products, Deborah Ng, head of ESG at GMO, a global asset management firm, co-founded by veteran investor Jeremy Grantham, said:

“Similar to credit ratings, investors should not rely solely on external ESG ratings as the sole determinant of investment decisions. Just as credit ratings are one of many inputs in investment analysis, ESG ratings should be considered alongside other factors such as strategy, market positioning, and financial performance.  We welcome thoughtful and well-considered regulation that holds ESG research providers more accountable for their activities and aims to improve the reliability and quality of the ESG ratings that many investors rely on. By ensuring transparency, accuracy, and consistency in ESG ratings, regulations can enhance investor confidence and facilitate better informed investment decision-making.

My hope is that any new regulation is not too rules-based as that could over time lead to significant risks going unreported because they weren’t anticipated when the rules were initially made.”