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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Sustainability Audit, ESG Rating and Emerging Mandates from Government and Regulators

Mehta Infra Ltd pays a fee to an ESG rating provider and also buys consulting services from a group company of the same provider on improving its ESG practices. An independent director questions this arrangement. Which concern is most directly raised?

The main concern is a conflict of interest. Receiving consulting fees from the rated company through a group entity can affect the provider's independence and objectivity, so regulatory frameworks require rating providers to identify, avoid or manage such conflicts and disclose them.

  1. AA conflict of interest that can compromise the objectivity of the ratingCorrect
  2. BA breach of the requirement that ratings must be free of charge
  3. CA violation of the rule that a rated company cannot see its own rating
  4. DAn issue with the company's financial year-end

Explanation

When a rating provider or its group entity also earns consulting income from the rated company, its independence and objectivity may be compromised. Regulatory frameworks therefore require management of conflicts of interest. Ratings are not required to be free, and a company may see its rating.

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