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SEC flags risks for credit rating agencies in ESG boom



(Reuters) – Credit rating agencies face new risks as they plunge into the fast-growing business of environmental, social and governance-based investments, the US Securities and Exchange Commission warned in a new report.

Investors have poured record sums of money into mutual funds using ESG criteria to select holdings, which led to the increase in rating services aimed at guiding these investments.

It creates new potential risks for credit rating agencies, such as failing to follow rating methods and failures. to address conflicts of interest, the SEC said, issues that have plagued the industry since the 2008 financial crisis.

DBRS Inc, Fitch Ratings, Kroll Bond Rating Agency Inc. and S&P Global Ratings are among the companies monitored by the SEC.

The SEC's 2021

report, which is based on surveys of credit rating agencies, said that by adding ESG factors, credit rating agencies can deviate from their usual methods, policies or procedures that may not be properly disclosed to investors, the SEC said. [19659002] Adding ESG ratings also increases the risk of new conflicts of interest if companies feel pressured to give higher ESG ratings than is justified when the subject is also a customer, said the SEC. [19659002] Transparency and consistency in ESG investment ratings have has been subject to increased scrutiny to help combat so-called "greenwashing". Grades can often be in conflict with each other because analysts assigned different points to issues such as emissions, workers' wages, or the composition of the company's workforce.

The SEC is developing a new rule to disclose information on ESG issues, including risks of climate change and the composition of the workforce.

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