ESG Scores Plagued by Complex Ratings, Says RBI
According to the Reserve Bank of India (RBI), the rating systems employed by companies to calculate scores for meeting Environmental, Social, and Governance (ESG) standards are excessively complex and employ too many variables, leading to a convoluted representation.
In its Report on Currency and Finance 2022–23, the RBI highlighted that the complexity of the process makes it difficult for ordinary investors to comprehend the overall ESG score. The report also expressed concerns about the use of arithmetic averages to aggregate various parameters for computing ESG scores.
The RBI commented that the E, S, and G scores can be regarded as interchangeable, providing companies with the opportunity to conceal inadequate performance in one area by excelling in others.
The RBI also pointed out that the rating provided by an ESG rating agency is influenced by the agency's inherent bias or the overall perception of the company, as per studies.
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The RBI added that the accuracy and effectiveness of ESG ratings cannot be evaluated using standard techniques like back-testing because the lack of straightforward and observable results makes it challenging.
According to the central bank, the credibility of ESG ratings is further compromised by the lack of a suitable regulatory framework to oversee the methodology or data collection process related to these issues.
The RBI cited reports which revealed that the 20 largest global ESG funds have invested in an average of 17 fossil fuel producers each.
Source: The Economic Times
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