Code of conduct for providers of ESG ratings and ESG data products

We refer to the Monetary Authority of Singapore’s consultation paper on the proposed code of conduct for environmental, social and governance (“ESG”) Rating and Data product providers. We appreciate the opportunity to provide our perspective on the draft code of conduct.

Norges Bank Investment Management is the investment management division of the Norwegian Central Bank (Norges Bank) and is responsible for investing the Norwegian Government Pension Fund Global. NBIM is a globally diversified investment manager with 12,429 billion Norwegian kroner at year end 2022. Of these, about 5,76 billion SGD was invested in the shares of 87 Singaporean companies at year end.

As a long-term and global investor, we consider our return to be dependent on sustainable development in economic, environmental and social terms. We therefore need information on companies’ exposure to sustainability risks and opportunities, how these are managed, and relevant performance metrics. Our internal analysis of portfolio ESG risk draws on the metrics and indicators underlying ESG ratings, rather than the ratings themselves. However, although we do not use individual ESG ratings directly to make investment decisions, we do consider them a useful complimentary source of information for our risk management and stewardship activities.

We welcome MAS’ proposal to elevate standards and disclosures of ESG ratings and data products via an industry code of conduct for providers, which will cover best practices on governance, management of conflict of interest, and transparency of methodologies and data sources. Increased transparency on ESG ratings can enhance pricing efficiency and the well-functioning of markets. This can contribute to a higher degree of confidence in the use of these products within financial markets, benefiting investors while also enhancing market integrity, risk pricing, and capital allocation.

The diversity in the assumptions, objectives and methodological approaches used by rating providers, while positive if well understood, might not always be apparent to stakeholders, which can cause ESG ratings to be misinterpreted. We welcome Principle 4 on transparency, which is essential to enable users of ratings and data products to use them with confidence.

We believe that rating providers should publicly disclose their methodologies, data sources, and the weights used to generate overall ESG ratings. We therefore welcome the call for transparency on methodologies as well as the suggested best practices on labelling of the rating, sources of data, measurement objectives of the ESG rating or data product, criteria used to assess the covered entity, the KPIs used to assess the covered entity against each criterion, and their relative weighting. Providers should also be transparent on substantive changes they make to their methodology, and explain the impact these have on the quality, coverage, and distribution of ESG ratings; we therefore suggest that a requirement is added to enable disclosures of methodology change impacts. We suggest a reference is also added to disclosure of whether the ESG rating is a relative assessment of an entity compared to its peers or an absolute score, together with disclosure of what constitutes a peer group if the rating is expressed in relative terms. The requirement on disclosure of the measurement objective of the rating or data product could also be edited to include an explicit reference to the chosen approach to materiality, which could help users better understand what a rating seeks to achieve.

We believe that ESG rating providers should have policies and procedures in place to manage conflicts of interest, including functional separation of business units assigning ESG ratings and providing advisory services to rated entities. We therefore support Principles 2 and 3 and the importance of identifying, managing and disclosing conflicts of interests that may compromise the independence and objective of entities’ operations. Best practice under these principles could also include transparency on providers’ governance and resources, including funding models and fee structures. We believe that ESG rating providers should have appropriate systems and controls in place to detect and correct efforts, and adequate resources to ensure ratings quality. We therefore support the reference to adequate resources in the best practices under Principle 1. Finally, although engagement with rating providers can be resource-intensive from an issuer’s perspective, we believe that ESG rating providers should provide rated entities with an opportunity to correct any factual mistake, a so-called “right to reply”. We therefore support proposed Principle 7.
We thank you for considering our perspective and remain at your disposal should you wish to discuss these matters further.

Yours sincerely

Carine Smith Ihenacho
Chief Governance and Compliance Officer

Elisa Cencig
Senior ESG Policy Adviser