Chaos in ESG ratings – a problem for COP or is COP the problem?

A recent report from the Asia office of Ohio-based Institute for Energy Economics and Financial Analysis has revealed chaos in the world of ESG ratings. Using the example of two utilities, it shows how companies transitioning into cleaner energy may be underrated relative to one actively involved in fossil fuels.

The main reason for this paradox is the reliance on ratings on companies’ disclosures, which are often self-reported and unaudited. The report highlights other issues, such as the low level of ratings of smaller businesses, the weakness of aggregating scores into a single metric, and the industry-specific dependence of ESG scores. The report makes several recommendations, including the need to develop a standardized and specific definition of ESG rating.

The ever-increasing need for standardisation of ESG ratings

Doesn’t all this sound familiar? The need for standardisation has been a theme of some of our recent blogs, including our most recent one, but so has our insistence that the best route forward is reliance on independently gathered data, analysed using advanced AI techniques.

In our view, the same independence of thinking and action should be applied to the forthcoming COP27, the United Nations Climate Change Conference.

Each year, thousands of worthy people gather together to publish to each other what “great” progress they are making in controlling emissions and the policies and processes that have been, are being or will be implemented (more than 50,000 documents in all!).

One of the problems with the COP approach is that each year, there is pressure to demonstrate that everybody is doing something, However, it also generates antagonism in different ways – among governments, who feel they are being put under undue pressure, and among environmentalists, who believe that not enough is being done.

Avoiding groupthink to make real progress

Is a massive conference the best way to manage things, or does it lead to the groupthink problem of The Emperor’s New Clothes? This is where everybody believes that they are doing something new, different or interesting each year, but in fact they are not.

As the Institute of Economic Affairs’ Global Energy Review demonstrates, the best way of reducing carbon emissions is a very large cut in economic activity (due to COVID-10). This is not something that any government chooses voluntarily. However, progress with renewables is one of the reasons (along with economic contraction) why emissions from one of the world’s worst emitters, China, have fallen significantly.

As the International Renewable Energy Agency (IRENA) has identified, the real progress being made and the main opportunities remaining are from the switch to renewables. Wouldn’t this, combined with reliable independent data about the extent to which individual companies’ activities are supporting the switch to renewables, forcing companies to follow the renewables path, through pressure from investors, employees, customers, governments and NGOs, be enough for the world to make the progress it needs?

Find out more about the progress being made on the switch to renewables by downloading a copy of our Green Energy Trends report here.