Prospects for harmonization of ESG ratings in the SCO countries
Demand for independent ESG ratings is on the rise, driven by increased investment tied to companies implementing sustainability principles. The countries of the Shanghai Cooperation Organization (SCO) also joined this process and held a summit on July 4, one of the central themes of which was the joint achievement of the goals of sustainable economic development.
Olga Kalyuzhnaya, President of the Russian Forest Association: “There are many ESG ratings and methodologies, but each rating agency has its own approach and methodology, so the same company can have a completely different rating. There are no uniform standards in the SCO countries that would regulate the activities of rating agencies. As a result of the lack of a transparent system, the market is fragmented, which, on the one hand, can lead to unfair competition, and on the other hand, to an excessive administrative burden”.
Among the SCO members there are both countries with developed ESG practices (India, China, Kazakhstan, Russia) and countries that are just starting to develop ESG regulation. Here are three main problems that are inherent in the ESG rating market of all SCO countries:
- lack of a unified methodological approach to determining the ESG rating;
- low transparency of ESG rating methodologies;
- Liquidity of ESG data provided by the market.
A certain advantage of the Russian market is that ESG ratings are provided by regulated credit rating agencies. The Bank of the Russian Federation has already taken an important step: in December 2021, it issued recommendations containing an indicative methodology that credit rating agencies can follow. A universal definition of the ESG rating, an approach to determining the minimum set of factors and their weights, and the introduction of a single rating scale for all credit rating agencies were also proposed.
Expanding cooperation within the framework of the SCO is currently one of the priorities of Russia's foreign policy. At the current stage, we are talking about the formation of a communication expert platform for regular exchange of experience and discussion of the current status of the development of ESG regulation practices.
The next step for the development of this initiative is the harmonization of ratings and their mutual recognition. This is possible only after the introduction of the necessary regulation in all SCO countries. The key thing that synchronization can bring is increased interaction and an increase in the number of joint projects, and as a result, an increase in investment volumes.
The formation of a common coordinate system and a common field of indicators for ESG reporting will simplify the process of communication between business and investors from the SCO countries, as well as financial structures and regulators.