Faculty of law blogs / UNIVERSITY OF OXFORD

The Governance of ESG Ratings and Benchmarks (Infomediaries) as Gatekeepers: Exit, Voice and Coercion


David Ramos Muñoz
Associate Professor of Private Law at Universidad Carlos III de Madrid
Agnieszka Smoleńska
Assistant Professor at the Institute of Law Studies of the Polish Academy of Sciences


Time to read

3 Minutes

Can you regulate traffic without traffic lights? The rise in importance of environmental, social and governance (ESG) factors has exposed market participants and investors to a flood of new and complex information, which is hard to process without tools to synthesise it. This, in turn, places the focus on infomediaries, ie, providers of ESG ratings, scores and indices.

The growing centrality of such infomediaries has attracted the interest of regulators that seek to ensure that infomediaries both improve market decisions, and facilitate, and not hinder the green transition. In June 2023 the European Commission published a long awaited proposal to regulate ESG ratings providers, giving rise to broad discussion about whether the EU approach is broadly right or incoherent. The discussion typically hinges on whether ESG infomediaries are more like credit rating agencies, benchmark (index) providers or financial advisors.

In a recent working paper, we propose a different approach, namely one that tries to look deeper into the different processes that ESG infomediaries enable, differentiating between 'exit’, ‘voice’, and ‘coercion’. Regulation of ESG infomediaries and their gatekeeping role requires a discussion of what they can (and should) do, and the proposed rules that try to help sustainability-related information cater to investors’ preferences, and help organisations achieve the sustainability transition. The combination of these goals can create an interpretative tension. However, this cannot be understood without a discussion about the dynamics through which change in organisations occurs.

Our analysis draws on Hirschman’s well-known distinction between ‘exit’ and ‘voice’ based mechanisms for ‘recuperation’ of failing firms, adding ‘coercion’ as a key element when law is involved. Poor sustainability practices can be seen as an organizational failure, which reduces the value that investors (or customers) draw from belonging to the organisation. Those investors (or customers) may choose to ‘vote with their feet’ (exit), or to stay and change the conversation (voice). In practice, they may also bring the people responsible for the failure to court. So far, the EU has prioritised the ‘exit’ dimension, improving the flow of sustainability information. New disclosure rules seek to coordinate the disclosures of issuers, market participants and benchmarks to help investors divest from sustainability-underperforming firms, which may, in turn, ‘recuperate’ under the threat of exit… or so the theory goes since the evidence is inconclusive.

A proper understanding of infomediaries’ impact needs to also consider the voice—engagement—dimension. In a piecemeal fashion, EU laws promote ‘engagement’ of investors and owners  through several legislative instruments (eg, 2019 Shareholder Rights Directive). The role that ESG infomediaries may play in this context is not straightforward. On the one hand, by outsourcing the analysis of ESG factors (including the scope of concerns and how different issues weigh against one another) to external providers, investors effectively eschew the engagement on critical ESG issues. On the other, ESG ratings and scorings may enable engagement in bank financing and investors-firm relationships. Some scholars have advocated for metrics governance in this context seeking to instil adequate engagement at the level of methodology formulation.

So far, the least clear governance mechanism is the use of law’s ‘coercion’ to ‘penalise’. The ESG framework is more enabling than punitive, and the normal course is for practice to emerge before ‘mal-practice’ is punished. Furthermore, ESG ratings (and the benchmarks based on them) present unique challenges: they are close to ‘pure opinions’, or forward-looking speculative statements, and thus a difficult basis for liability. This is especially the case for the balancing of different E, S and G aspects of a firms’ performance. So far, the Commission’s proposal has sidestepped this dimension.  If this decision is left to the private laws of Member States, divergence can be expected. Laws can diverge on the relevant elements of liability, and may hinder the effectiveness of the rules: if certain elements of the ESG rating methodology are not ‘material’ for civil liability, this may undermine the duty to disclose them accurately, if market participants cannot ‘reasonably rely’ on ratings and benchmarks, this may undermine their use of said ratings and benchmarks to create and market products (eg, funds) under the SFDR. If civil liability resulting from investors’ claims is perceived as remote, while complaints by issuers (especially large ones) are seen as a clear and present risk, this may skew the system towards ‘forbearance’ with those issuers.

Some uncertainty around the coercion/penalty route is understandable until there is more clarity on market practice and the purpose of regulation. Arguably, much of this uncertainty can be mitigated if regulation of ratings and benchmarks proceed by stages, achieving clarity and certainty over certain measurable, scientifically based goals, like climate change, and then extrapolating the lessons to other sustainability objectives.

Analytical model for exit, voice and coercion

Analytical model for exit, voice and coercion

Source: Compilation by David Ramos Muñoz, Cerrato, and Lamandini (forthcoming)


David Ramos Muñoz is an Associate Professor at the University Carlos III Madrid.

Agnieszka Smoleńska is an assistant professor at the Institute of Law Studies of the Polish Academy of Sciences.



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