G20 urged to drive better environmental, social investing practices

By Simon Jessop

LONDON (Reuters) - The world's biggest economies need to do more to ensure environmental, social and governance-related ratings and investments are effective in the transition to a low-carbon economy, a report from the OECD on Monday said.

Launched ahead of an October meeting of the G20, the report said while the drive to invest using ESG criteria could help international climate objectives, "considerable challenges" needed to be overcome.

Specifically, the report highlighted the wide variety of approaches to assessing ESG issues, inconsistent data and a lack of comparability between ESG rating methodologies.

"These competing dynamics and challenges associated with ESG rating and investing could compromise market integrity, erode investor confidence, and mask the extent of environmental and climate-related impacts of investment decisions," the report said.

"Ultimately, challenges could constrain the pace and scale of the capital allocation needed to achieve tangible progress to support long-term value and a transition to low-carbon economies."

The report follows the opening of a consultation by the International Organization of Securities Commissions on ESG ratings in July and comes ahead of the next round of global climate talks in November.

The OECD called on governments to ensure global transparency, comparability and quality of core ESG metrics.

Specifically on environmental ratings, the report said ratings providers appeared to place less weight on negative environmental impacts and more on corporate disclosure of policies and targets, with little assessment of their impact.

With ratings providers often using a large number of sub-category scores, the OECD called for greater clarity over the meaning of such scores, to better help investors.

Investors were also being held back by issues including "inadequate" data on net zero pathways, the lack of policy clarity regarding carbon pricing and support for renewables and a lack of products and measurement tools to allow investors to align portfolios with specific climate objectives.

"Overall, greater international co-operation is needed to ensure that ESG and climate transition-related practices progress in a manner that ameliorates the current market fragmentation, and strengthens investor confidence and market integrity."

(Reporting by Simon Jessop;Editing by Elaine Hardcastle)