Environmental, social and governance scores “meaningless” without clarity: Fraser Institute

A new Fraser Institute report warns Canadian investment managers that relying on environmental, social and governance scores without clear standards could open the door to lawsuits.

Source: PICRYL

A new Fraser Institute report warns Canadian investment managers that relying on environmental, social and governance scores without clear standards could open the door to lawsuits and regulatory trouble.

The report, authored by Bryce Tingle, the N. Murray Edwards Chair in Business Law at the University of Calgary, says ESG ratings are often “arbitrary, opaque and inconsistent,” with no universal standard governing how they are calculated.

As a result, the same company can receive drastically different ratings depending on the agency doing the assessment.

One example cited in the report involves Tesla. One rating agency gave the electric car maker high marks for environmental performance, while another downgraded it heavily over workplace concerns.

“If investors don’t understand which criteria are being used, the ratings become essentially meaningless,” Tingle wrote.

He said vague ESG claims have already led to lawsuits and regulatory fines in the U.S. and Europe, where asset managers were accused of “greenwashing” — exaggerating environmental credentials. In those cases, firms had to pay penalties or overhaul their marketing.

“Canadian managers who promote ESG funds without robust, verifiable metrics risk facing the same legal consequences,” Tingle said. “When you promise something to investors based on these ratings, and they turn out to be unreliable, you’re inviting a lawsuit.”

The report notes that regulators in the U.S. and Europe are tightening disclosure rules, requiring firms to prove that their ESG claims match the reality of their investments.

Tingle argued Canada should follow suit to protect both investors and firms.

The report urges Canadian fund managers to be cautious about using ESG ratings to market investments, warning that current practices lack transparency and may not survive future legal scrutiny.

The Canadian federal government blog on economic development calls adopting ESG practices “a winning strategy for SME (small and medium enterprises).”