5.6.1 Problems sustainability rating agencies may face

Lack of independence. Similarly to credit rating agencies, sustainability rating agencies may be looking at potential independence issues. The independence of sustainability rating agencies and the integrity of the sustainability rating process can be compromised by potential conflicts of interest. The cause of this potential problem is the nature of the relationship between the rater and the company object of the rating. Sustainability rating agencies may be careful with the division of the consulting and rating services they provide to companies.

Lack of standardization.1 Just as we saw in previous chapters, such as chapter 2, the sustainability market is less developed than the financial market. Among others, the lack of globally accepted definitions and globally accepted sustainability reporting standards contribute to the multiple and double disclosure of information. The complexity of the information disclosed with the lack of transparency (see below) may contribute to the challenging development of globally accepted rating standards. Just as self-regulation of credit rating agencies is no longer an option (Coffee, 2014 pp. 271), self-regulation of sustainability rating agencies might not work well either. Governmental intervention has proved beneficial to credit rating agencies it may also be a viable option for sustainability rating agencies. However, looking at theNationally Recognized Statistical Ratings Organizations, which give a “licensing power” (Coffee, Jr., 2014) to credit rating agencies, and to the fact that it is believed to be the cause for lower innovation, competition,2 ratings accuracy and standard’s quality, this option may be reconsidered for sustainability rating agencies.

Lack of transparency.This problem is related to the lack of standardization. As there is no globally accepted set of rating principles, the raters may not disclose their ratings’ methodology. Different rating methodologies may lead to different results, even when the same companies, disclosing the same information are rated by different sustainability rating agencies or sustainability indices.

Lack of credibility of information.3 This problem is related to the lack of standardization, to the lack of transparency and to the lack of assurance of the information disclosed by companies. Therefore, it is difficult for raters to gather credible information and provide accurate ratings.

The “subscriber pays” model.By adopting this model, sustainability rating agencies may avoid the conflicts of interest inherent of an “issuer pays” model, where the rating agencies need the issuer’s loyalty more than the end-user’s (Coffee, 2014).4 However, one cannot forget that the “subscriber pays” model also allows for the “free-rider” problem, when the information provided by the credid rating agencies becomes a “public good” (Robert J. Rhee, 2015). As we saw above in section 3, both models allow for conflicts of interest.