(Bloomberg) -- Norway’s $1.4 trillion wealth fund is backing a European Commission proposal to overhaul the ESG ratings industry amid concerns that a lack of transparency and consistency among score providers is undermining confidence.

The fund, whose equity investments are spread across roughly 9,000 companies, echoed the commission’s concern that “the ESG rating market suffers from deficiencies,” in an open letter published on Friday.

These “could undermine investors’ and rated entities’ confidence in ratings,” Norges Bank Investment Management Chief Governance and Compliance Officer Carine Smith Ihenacho and Senior ESG policy adviser Elisa Cencig said in the letter. 

The Commission unveiled its sweeping proposal to crack down on ESG ratings firms in June, amid growing evidence that investors have little way of understanding or comparing how providers arrive at scores. That’s after years of unfettered growth during which ESG data providers latched on to the rise in environmental, social and governance investing.

The Commission’s proposal, which needs to be negotiated by the European Parliament and EU member states and may be subject to changes, has implications for companies including Moody’s Corp., MSCI Inc. and S&P Global Inc., all of which offer ESG ratings in combination with other services.

Bloomberg News parent Bloomberg LP and affiliates provide access to ESG data products, including Bloomberg’s proprietary ESG scores. Bloomberg does not calculate ESG ratings.

In its draft proposal, the EU Commission said an “‘ESG rating’ means an opinion, a score or a combination of both.”

If the EU Commission’s plan is approved, ratings firms will be expected to provide much more detail around their methodologies, and reveal whether any scores have been generated with the help of artificial intelligence.

“We believe that ratings providers should strive to use externally assured data whenever available,” Ihenacho and Cencig said. The Norwegian wealth fund doesn’t use individual ESG ratings directly but considers them a “complimentary” source of information, they said.

Read More: EU Puts ESG Rating Firms on Notice as Major Overhaul Planned

In general, companies that offer ESG ratings should be required to disclose their methods, sources of data and weighting system for generating the overall rating publicly, Ihenacho and Cencig said. They should also be open about when they make major changes to how the ratings are developed, and more transparency is needed on how ESG providers are avoiding conflicts of interest, they said. 


--With assistance from Frances Schwartzkopff.

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