Regulators in Europe, India and beyond are moving to oversee ESG rating providers using templates designed for credit rating agencies. In an analysis published by LSE's Grantham Research Institute on Climate Change and the Environment, Sangeeth Selvaraju and co-authors from IIT Kharagpur argue this is a category error. Credit ratings forecast a single verifiable event, default, whereas ESG ratings aggregate many dimensions with no single target variable, so their methodological diversity is a feature rather than a flaw.
The authors marshal evidence that ESG ratings do not carry the systemic weight of credit ratings. Correlations between providers are low, large institutional investors typically build their own scores and treat third-party ratings as one input among many, and a poor assessment does not cascade through the financial system in the way credit rating failures did in 2008. India's strict licensing regime, they note, prompted several established global providers to exit, narrowing the diversity of views available to investors.
Rather than licensing raters, the analysis recommends concentrating regulatory effort on corporate sustainability disclosure, verification, taxonomies and anti-greenwashing enforcement, with transparency requirements on rating methodologies and conflicts of interest handled through existing securities rules and voluntary codes. For academics studying sustainable finance, the piece is a useful corrective to the assumption that convergent ESG scores are either achievable or desirable.