Publication: Working Paper Series No. 149

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“The Governance of ESG Ratings and Benchmarks (Infomediaries) as Gatekeepers: Exit, Voice and Coercion” by David Ramos Muñoz (Charles III University of Madrid) and Agnieszka Smoleńska (Polish Academy of Sciences) was published on 4 August 2023 in the EBI Working Paper Series No. 149.

Given the complexity of sustainability issues in a financial context, ESG financial market information intermediaries (infomediaries) have emerged as a way to overcome asymmetries between firms and investors. These include various types of ESG ratings, scorings and benchmarks (indices). Like traditional index funds and credit ratings, ESG infomediaries have a gatekeeper function in the market. Yet, arguably their role can potentially be more relevant, given the complex and multi-faceted nature of the ‘E’, ‘S’, and ‘G’, and the difficulty of processing the vast amounts of information supplied by issuers. Perceptions that this may give rise to greenwashing loom large. To fully capture the governance uses of ESG infomediaries, this paper differentiates between exit-voice-coercion-enabling regulatory instruments. Regulation of ratings and benchmarks may facilitate the ‘exit’ of customers and investors through market-mechanisms, give ‘voice’ to critical constituencies, or introduce mandatory ‘coercion’. The analysis identifies the different ways in which existing rules (especially in the EU) shape the supply and demand for ESG financial market infomediaries and explores the ‘external governance’ levers with regard to firm sustainability. On this basis, the paper critically assesses the European Commission’s proposal for regulation of ESG ratings and formulates appropriate proposals.

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