The origin of this can be explained from the database used. First, since they do not have all the complete data, there are situations where the rating agencies must infer some data. Second, the standardization of information (percentages, absolutes or fractions) is a complex process and is not seen equally. And finally, the construction of the models are different, since some rating agencies may take information from three or five years ago. Therefore, the process becomes somewhat subjective.
Do the appraisers have to speak the same language?
To combat this problem, there is a global push to standardize ESG methodologies used by rating agencies, which aims to make it easier for investors to compare companies on a more level playing field and provide a basis for more meaningful comparisons. Without this standard, investors risk being misled by the same companies, which, for example, may place an emphasis on certain aspects of their ESG rating at the cost of others, in order to manipulate their overall score.
More than an approval, Eduardo Piquero, director of MexiCO2, a platform that seeks to develop the environmental market, pointed out that there is a need for regulation. “Naturally these rules should converge, just as it happened with the basic (financial) reporting standards, the rating agencies are somewhat following this evolution, although they are a little behind. Today ESG reporting is voluntary, and that must change. The investor makes decisions all the time and this information is a non-financial risk. Not everyone has to report the same, but everyone should report, since you can see how you progress year after year,” said Piquero.
Recently, after more than three years of effort, the undersecretary of the SHCP, Gabriel Yorio, presented the Sustainable Taxonomy of Mexico during the Banking Convention that took place in March of this year. According to the SHCP, this is a “classification system with criteria and indicators that allows classifying various economic activities according to their contribution to mitigation and adaptation to climate change.”
This is one of the biggest steps towards regulation that has been taken in Mexico in recent years. “Though, we need companies to get to work on reporting, not just the 10 largest companies, they all are needed. We don’t have much time due to climate change,” warned Piquero.
Unlike languages in which we can quickly identify that another language is being spoken, in the world of rating agencies it is not always so easy to detect that another language is being spoken, but with a concerted effort towards standardization, a common language ESG measurement can become a reality, making ESG scores easier to understand and make an informed investment decision.