As investors pour trillions into sustainable finance, the global market faces a critical question: who can be trusted to distinguish genuine green investments from marketing spin?
A new study published in the journal Regulation & Governance argues that while Environmental, Social, and Governance (ESG) ratings are essential for translating complex data into market signals, the rating providers themselves have become a source of distrust.
The research, co-authored by Agnieszka Smoleńska of the London School of Economics and Polish Academy of Sciences and Professor David Levi-Faur of the Hebrew University of Jerusalem, compares how the European Union and the United Kingdom are attempting to regulate this booming but controversial industry.
The gatekeepers of green finance
ESG rating providers act as intermediaries, translating the “noise” of corporate sustainability data into a clear “signal” for investors.
However, the industry has been plagued by inconsistent methodologies and conflicts of interest, leading to “aggregate confusion” where the same company can receive wildly different scores from different raters.
“The lack of standards in this area may present the risk of greenwashing or misallocation of assets,” the authors note, citing the International Organization of Securities Commissions (IOSCO).
Two paths to trust
The study identifies a divergence in how jurisdictions are handling these “trust intermediaries.” Both the EU and UK have adopted forms of “enhanced self-regulation” — a hybrid model that blends government oversight with industry expertise — but they apply it differently.
The EU has opted for a mandatory regime. Under new rules, ESG rating providers must be authorised and supervised by the European Securities and Markets Authority (ESMA), which has the power to conduct on-site inspections and impose fines. This approach seeks to “repair” trust through strict public enforcement and independence requirements.
In contrast, the UK has pursued a voluntary approach. The Financial Conduct Authority (FCA) delegated the development of a Code of Conduct to an industry-led working group. This regime relies on transparency and market discipline rather than direct public enforcement, focusing on the raters’ internal governance rather than systemic supervision.
The cost of distrust
The authors argue that these regulatory choices reflect whether policymakers view the market as merely needing “trust-building” for a new industry (the UK view) or urgent “trust-repair” for a broken one (the EU view).
Ultimately, the study warns that sustainable finance cannot function without trusted intermediaries. As the authors conclude, those who are meant to create trust must themselves be trusted; without credible oversight, the transition to a green economy risks becoming little more than a branding exercise.
