September 21, 2022

Toomey Asks ESG Ratings Firms For Info on Scores, Data Collection Practices

Requests Details on Transparency, Conflicts of Interest, and Use of Biased Sources

Washington, D.C. – U.S. Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) is asking ratings firms to provide information regarding their practices on calculating companies’ environmental, social, and governance (ESG) scores.

In letters to twelve different ratings firms, Ranking Member Toomey wrote:

“The industry of ESG investing and related services has grown tremendously in recent years. According to Bloomberg, global ESG assets are projected to reach $50 trillion by 2025, accounting for one-third of total projected assets under management globally. ESG ratings firms . . . play a key role in this activity by evaluating the degree to which more than 10,000 companies meet certain qualitative standards. As a result, they have the ability to influence capital flows to many companies.”

As the Senator points out, the information collected by ESG ratings firms often goes far beyond the extensive public disclosures that companies are required to make under federal securities laws:

“Existing law requires that companies describe their business, properties, legal proceedings, and risk factors. Companies must also provide management’s discussion and analysis of the firm’s financial condition, results of operations, liquidity, and capital resources. Each of these disclosure areas are legally required to include any material climate change information so that the disclosures are not misleading under the circumstances. In determining a company’s ESG rating, however, many ESG ratings firms consider information that is not material or financially relevant under federal securities laws,” Senator Toomey wrote.

Ranking Member Toomey requested the firms share any non-proprietary methodologies used to assign ESG ratings, including: the specific E, S, and G factors measured and how those factors are weighed; how the firms determine the scope of industry sectors, including whether they employ analysts with sector-specific expertise; and reports intended to capture controversies faced by a company, such as pending litigation, negative press coverage, or shareholder resolutions.

The Senator also asked the firms to answer a number of questions, including: whether companies have an opportunity to submit clarifying comments to their ratings for the benefit of investors; how the firms determine the credibility of the data sources used; how the firms approach ratings with respect to hot button political issues, including abortion and gun control; and how the firms deal with potential conflicts of interest, in cases where the firms also issue proxy vote recommendations or offer advisory services.

Letters were sent to MSCI, ISS, Bloomberg, Sustainalytics, Moody’s, Carbon Disclosure Project, S&P Global, FTSE Russell, RepRisk, FactSet, Refinitiv, and Arabesque S-Ray.

To read Ranking Member Toomey’s letters to the ratings firms, click here.