When the shortcomings in ESG ratings undermine the effectiveness of climate action by listed companies
The Climate talks initiated by Getlink aim to share with a community of economic and financial decision-makers the outcome of discussions, carried out in partnership with the TSE, on the impact that operational climate action taken by businesses has on their financial ecosystems. After two years of research, dialogue and sharing of concrete data, Getlink has launched a first cycle of Rencontres, the first of which focussed on the shortcomings in ESG ratings and how these can affect the concrete climate action of businesses..
Christian Gollier, Delphine d’Amarzit and Yann Leriche discuss the shortcomings of non-financial ratings in capturing the real effectiveness of business climate action.
The academic foreword developed by the Toulouse School of Economics, as voiced by Professor Ulrich Hege, points out the imperfections in the non-financial rating agency system.
Necessary but imperfect ratings
According to Ulrich Hege, Professor of Finance at the Toulouse School of Economics, ESG rating systems differ from one player to another, making it difficult to compare approaches. This is exacerbated by the lack of transparency in the methodologies used for those assessments, which are largely based on unaudited declarative data. The relevance of the data categories highlighted by certain indices can also be brought into question as can the significant conflicts of interest of certain issuers. There is therefore a gap between financial and non-financial reporting, which makes it difficult to obtain a proper assessment of the climate value of a business’s activities.
Nevertheless, Ulrich Hege maintains that, even though these ratings can be improved and need to be perfected, they are still useful and remain the main tool for providing information on the environmental actions of businesses.
The need to create indices that aggregate the widest possible range of data
Delphine d’Armazit, CEO of Euronext Paris, discussed ESG rating methods and the various indices created by Euronext, in particular the CAC40 ESG. It is essential that the indices created are based on an “open architecture to integrate a maximum number of criteria and data”, the relevance of which can sometimes vary from one ecosystem to another or from one country to another depending on cultural differences or the political choices of individual countries.
The importance of valuing the business in terms of its social benefits
Christian Gollier, CEO of the Toulouse School of Economics, argued in favour of an alternative method to ESG ratings, based on valuing the social usefulness of businesses by means of a price. He also highlighted the limits of the “vision of green activism, which is focussed solely on the efforts that businesses have to make” and not on the end consumer and the risk of creating a shortage of supply simply by imposing constraints on businesses which would automatically lead to higher prices. It is therefore vital that “States introduce rules to realign the collective interest and the interests of financiers, particularly for reasons of social acceptability” of the activities of private players.
How can the sustainability of economies be resolved by linking decarbonisation with maintaining output and businesses’ competitiveness?
Yann Leriche, CEO of Getlink, argued in favour of building a financial model that makes corporate climate action effective. It is necessary “to direct investment and financing to where it is relevant for climate action”.
When it comes to ESG ratings, Getlink is a very good example because, depending on the index, the Group’s ratings can vary according to the criteria selected, the data collected and the calculation methods used to measure a business’s social and environmental impact.
“The question of the cost of capital remains fundamental: we cannot live in a binary world, with finance on one side and ESG on the other”.
