Proxy Advice, ESG Ratings and Indices in Global Capital Markets

Sixty per cent of jurisdictions have established legal or regulatory frameworks governing proxy advisors, while a further 10% rely on voluntary codes. In most cases, the emphasis is on disclosure rather than authorisation, and four jurisdictions require proxy advisors to be licensed or registered.

While approximately two-thirds of jurisdictions require or recommend disclosure of voting policies or benchmark methodologies, only 8% explicitly require or recommend proxy advisors to take local market practice or company-specific circumstances into account.

Two-thirds of jurisdictions require or recommend disclosure of actual or potential conflicts of interest. However, only 8% explicitly require or recommend disclosure where proxy advisors provide consulting or other paid services to the same companies on which they also issue voting advice.

In 90% of jurisdictions, there are no recommendations or requirements addressing the competence, ethics or independence of the staff responsible for producing voting recommendations. In addition, 94% of jurisdictions impose no requirements, or make no recommendations, regarding engagement between proxy advisors and issuers prior to the issuance of voting advice. Whether such engagement takes place, as well as the modalities under which it occurs, is therefore largely left to market practice, which varies across proxy advisors.

Although ESG rating providers have gained prominence in capital markets only recently, two-thirds of jurisdictions have put in place frameworks governing their activities. Existing frameworks typically require disclosure of methodologies and periodic reviews, while ESG data providers remain outside the scope of regulatory coverage.

Almost one-third of jurisdictions have no explicit requirements or recommendations addressing the competence, experience, ethics or independence of staff developing ESG ratings. Two-thirds require or recommend disclosure of actual or potential conflicts of interest, but only 54% set expectations regarding the disclosure of ownership structures. Formal supervision of ESG rating providers also remains limited: only the European Union and India require registration of these providers, while most jurisdictions rely on voluntary codes or public lists.

Index providers present a somewhat different picture. Their regulatory frameworks are more developed than those for proxy advisors or ESG rating providers but often apply only to benchmarks that are considered significant or systemically important. Seventy per cent of jurisdictions have adopted frameworks, often using a proportional approach.

Methodology transparency is a core regulatory priority: 70% of jurisdictions require disclosure of index methodologies, and 64% require consultation procedures, explanation of rationale and user notification when material changes are made. The same proportion requires periodic methodology reviews, often involving some form of independent assessment.

Two-thirds of jurisdictions require disclosure of actual or potential conflicts and policies to prevent commercial interests from undermining benchmark integrity. By contrast, ownership transparency of index providers remains rare, with 96% of jurisdictions imposing no such requirement. Registration or authorisation requirements are more widespread and apply in 64% of jurisdictions.

The G20/OECD Principles of Corporate Governance recommend that entities and professionals providing analysis or advice relevant to investor decisions disclose and minimise conflicts of interest that could compromise the integrity of their work and ensure transparency in the methodologies they use.

Policymakers can support the informed use of these services without substituting the judgment of institutional investors or imposing requirements that could inhibit innovation and deepen market concentration. Proportionate oversight and clear expectations should focus on four key areas: the management of conflicts of interest, transparency of methodologies, quality assurance, and robust processes for correcting material errors.

The new OECD report on the role of capital market service providers in corporate governance highlights the following policy considerations:

• Conflicts of interest are a concern, particularly where firms provide services to issuers that they also assess, whether in assigning ESG ratings, advising on proxy voting, or constructing an index. While some jurisdictions require separation between affiliated businesses, further oversight and guidance on transparency of revenues by business line may be needed to ensure compliance and assess the effectiveness of internal controls where regulation is limited.
• Market concentration warrants continued oversight and proportionality in regulatory frameworks. While economies of scale matter in technology intensive, low-human resource business models, proportionate regulation and effective monitoring are essential to encourage new entrants, enhance transparency, and reduce overreliance on a small number of global providers.

* Including Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, the People’s Republic of China, Colombia, Costa Rica, Croatia, Czechia, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong (China), Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Norway, Peru, Poland, Portugal, Romania, Singapore, the Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Thailand, Türkiye and the United Kingdom.

This article was also published on the Harvard Law School Forum on Corporate Governance.