On February 1, 2024, presenter Jess Cornaggia discussed “The Governance of Certification Agents”. The lecture was moderated by Christoph Schiller.
Jess’ slides from the lecture can be found here and the Q&A can be found below.
[1] How the management of conflict of interest affect the usefulness to investors and other stakeholders?
Conflicts of interest potentially distort the information content of credit ratings, guidance from proxy advisors, and ESG ratings. These metrics become more useful to investors and other stakeholders to the extent conflicts are managed. However, it is first necessary to establish whether conflicts of interest meaningfully distort information content. Just because an information intermediary has the potential to fall prey to a conflict of interest, this does not mean it does so in practice. Most information intermediaries are regulated or apply their own governance structures to manage conflicts. This is not to say they always get it right. Research is needed to pinpoint problematic conflicts so they can be addressed.
[2] Industry- community engagement in practice?
Information intermediaries engage heavily with the industries and firms they cover. This is particularly true recently for ESG ratings. ESG ratings measure firm performance along dimensions that are important to investors from a nonpecuniary perspective. Therefore, ESG raters must have clear input from investors as to which dimensions of firm performance they wish the ratings to reflect.
[3] What is the current status of Industry Specific Standardization of ESG Ratings & International Harmonization of ESG practices?
This process is ongoing and far from complete. The following review article is helpful for understanding recent progress in ESG standards harmonization in Europe: the-international-harmonisation-of-esg-standards_a-challenge-and-a-need_lisbon-virtual-seminar_april-2021.pdf (eurofi.net)
[4] Do you think higher environmental regulations on firms can be an exogenous shock to ESG rating? For example, the European Union started to force firms to report meticulous carbon emissions through all production processes, for instance, carbon emissions on electricity usage. Do you think there are empirical impacts on ratings?
It would be more accurate to interpret this example as a shock to firms’ environmental behavior, which then is reflected in the rating. An exogenous shock to firms’ ESG ratings would involve a change in ESG ratings that are unrelated to firm behavior.
[5] Deutsche Börse acquired 80% of ISS in 2020. Isn’t it a big conflict of interest? Peloton Capital Mgmt and investor Stephen Smith acquired Glass Lewis in 2021 from Ontario and Alberta for an amount not disclosed. GL is now offering services to issuers to improve their voting recommendations on them, following ISS strategy. In my view offering these services to issuers should be forbidden, not only identified, disclosed or “mitigated”. But at least revenues from issuers should be clearly disclosed, as they represnt a significant and growing share of thier income.
Regulating proxy advisors is controversial, with the U.S. SEC taking steps in July 2020. The recent ownership changes of ISS and Glass Lewis certainly raise questions about whether the companies will remain independent. Disclosure of fees is a reasonable policy. This practice is standard for auditors, for example. Credit rating agencies, on the other hand, do not disclose fees. An exception is in the public finance space, where public issuers sometimes disclose how much they pay for ratings. See, for example: Rating Agency Fees: Pay to Play in Public Finance? | The Review of Financial Studies | Oxford Academic (oup.com)
[6] Besides the inside information they dig and provide, how can those agents make sure materiality of those ratings?
Reputation capital plays a big role in the world of information intermediaries. It is not a panacea, but if market participants lose confidence in the information content of credit ratings, guidance from proxy advisors, and ESG ratings, then the information intermediaries producing these metrics will find it difficult to retain market share.
[7] What is the correlation between the output of certification agents?
Recent evidence from the CFA institute indicates the corporate credit ratings from the Big 3 CRAs (Standard & Poor’s, Moody’s, and Fitch) correlate between 94% and 96%. The correlation among ESG raters depends on the benchmark rater but is much lower. For example, MSCI’s correlation with S&P’s ESG rating and Sustainalytics is less than 50%. (Source: ESG Ratings: Navigating Through the Haze | CFA Institute Enterprising Investor)
Jess’ Questions for Brilliant Young Minds:
- ESG raters use a variety of technologies to construct their ratings. These include AI, surveys from companies, publicly available information, and direct feedback from companies. Which of these techniques is most reliable or otherwise unbiased?
- How should ISS and Glass Lewis be regulated, if at all? The U.S. SEC only recently introduced regulation for these firms. How much oversight should the SEC provide, and along which dimensions of ISS’ and Glass Lewis’ business practices?
- What is the optimal compensation structure for credit rating agencies and other information intermediaries? The issuer-pays model has drawn tremendous scrutiny but viable alternatives are scarce. Is there a better model, and if so, under what circumstances should it apply?

Jess Cornaggia is the Alumni Professor of Finance at the Smeal College of Business at PennState University. Professor Cornaggia’s research interests include financial intermediation,corporate finance, household finance, fintech, and ESG. His research has appeared in peer-reviewed journals, including the Journal of Financial Economics, Review of Financial Studies,Management Science, and Review of Finance. He is an Associate Editor at ManagementScience and the Journal of Banking and Finance. Professor Cornaggia received his B.S. andMBA from Gonzaga University and his Ph.D. in Management Science from the University ofTexas at Dallas in 2009.
For more information on the webinar please contact Professor Jun Yang, Director of the Institute for Corporate Governance at icg@indiana.edu.
Leave a Reply