The Role of Capital Market Service Providers in Corporate Governance

1. Policy considerations

Abstract

This chapter sets out policy considerations for proxy advisors, ESG rating and data providers, and index providers. In addition, it identifies two overarching issues that cut across these market service providers. First, it highlights the significance of conflicts of interest affecting all three types of service providers. Second, it addresses concerns related to market access and proportionality in regulatory frameworks.

1.1. Cross-cutting policy considerations

Today’s global capital markets rely on a wide range of service providers. This peer review focuses on proxy advisors, ESG ratings and data providers, and index providers (both ESG and non-ESG). While securities analysts and CRAs share certain characteristics with these providers, they are already subject to more established regulatory frameworks. Therefore, this report includes only a brief section on these traditional providers, offering a point of reference for how jurisdictions have addressed similar issues in related contexts.

Significance of conflicts of interest. 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 to assess the effectiveness of internal controls where regulation is limited.

Market concentration warrants continued oversight and proportionality in regulatory frameworks. The proxy advisory and ESG rating industries are highly concentrated at the global level, raising concerns about competition, accessibility and accountability. 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.

1.2. Proxy advisors

Proxy advisors play an increasingly influential role in shareholder voting, yet oversight remains uneven. Seventy per cent of jurisdictions have frameworks in place, while 30% have none. Introducing minimum standards – through regulation or recommendations – and assigning clear responsibilities for their oversight could strengthen transparency, accountability and market confidence.

Definition of proxy advisors. Most definitions across jurisdictions share similar elements, indicating a degree of convergence. However, differences remain. The following definition may serve as a reference for policymakers and market participants considering how to define “proxy advisors”:

• Proxy advisors are entities that, on a professional and commercial basis, provide shareholders with analysis, research or recommendations to support the exercise of their rights in a company, including voting decisions on general meetings and public offers. 

Benchmark policies and company-specific conditions. While two-thirds of jurisdictions require or recommend proxy advisors to disclose their benchmark policies, only 8% of jurisdictions require or recommend proxy advisors to consider national market and company-specific conditions in their recommendations. In practice, many advisors do not revise their advice following company feedback, and few annex company feedback to their voting recommendations. Potential improvements could include:

• Requiring or recommending proxy advisors to share their reports with companies without undue costs, allowing them a reasonable timeframe for review.

• Appending company commentary to the final report could strengthen transparency without significant additional regulatory burden and give investors the companies’ perspective. This practice is already mandatory in India and has been adopted by at least one proxy advisor in Europe.

• Requiring revised benchmark policies to be published sufficiently ahead of the proxy season – when most companies hold their shareholder meetings – to improve predictability and transparency for companies and investors.

• When proxy advisors recommend voting positions beyond legal requirements, disclosure of the rationale – already a practice in India – could inform a better understanding of voting recommendations in the local context, foster transparency, support informed investor decisions and strengthen trust in proxy advice.

Institutional investor mandatory voting and use of proxy advice. Mandating institutional investors to vote on all or certain resolutions risks box-ticking behaviour and excessive reliance on proxy advisors, while raising compliance costs – especially for smaller institutional investors.

The competence, experience, ethics and independence of staff in proxy advisory firms are largely unaddressed. Ninety per cent of jurisdictions have no standards for the competence, ethics, or independence of proxy advisory staff. Targeted, disclosure-based requirements or recommendations could enhance quality, objectivity and accountability while avoiding unnecessary burdens on innovation or diversity of perspectives. For instance:

• Requiring firms to disclose headcount and the qualifications of their staff would help investors gauge both the depth of expertise and the capacity to engage with companies and navigate with integrity market-specific nuances.

• Firms could increase transparency around their use of temporary or seasonal staff during peak proxy season. Specifically, they could clarify the qualifications required, the training provided, and the supervision in place to ensure accuracy. They could also disclose the roles these staff perform – whether limited to data collection or extending to analytical work and voting recommendations.

Conflicts of interest. Disclosure of conflicts of interest by proxy advisors is uneven: while 66% of jurisdictions have laws, regulations, or codes in place, 34% have no framework. Only 8% require or recommend disclosure when advisors also provide secondary services such as consulting to listed companies. Potential policies to better manage conflicts could include:

• Requiring disclosure of revenues by business line, giving market participants clearer insight into proxy advisors’ potential conflicts. While proxy advisors set up internal controls such as firewalls between analytical and commercial teams, the absence of regulatory inspections limits verification of their effectiveness.

• Where existing conflict-of-interest management measures may be seen as insufficient, recommending that proxy advisors do not provide secondary services could be an option. In India, proxy advisors’ avoidance of providing secondary services to companies reduces conflicts and supports independence.

Registration/authorisation and monitoring. Only in Australia, Bulgaria, India and the United Kingdom, proxy advisors need to be licensed, registered or included in a public list, while other jurisdictions rely exclusively on disclosure and conduct rules. Ongoing debates, including in the EU, consider whether registration could improve oversight and accountability of these service providers, though such measures risk raising barriers to entry and further increasing market concentration.

1.3. ESG rating and data providers

Two-thirds of jurisdictions have frameworks for ESG rating providers. Most frameworks for ESG rating providers do not include ESG data providers. This creates a regulatory gap despite investor reliance on raw ESG data, including, for instance, on estimated greenhouse gas emissions and identification of companies selling controversial weapons. Extending oversight or adopting recommendations could strengthen the quality, consistency, and reliability of ESG data. For example, Belgium’s Financial Services and Markets Authority (FSMA) has published a webpage on good practices for ESG data providers, helping to promote their adoption.

Definitions of ESG ratings and ESG data products. Definitions vary across jurisdictions, reflecting different regulatory approaches. However, common elements in definitions suggest some convergence across markets. The following definitions may serve as a reference for policymakers and market participants in considering how to define “ESG rating” and “ESG data products”:

• ESG ratings provide an opinion, score or ranking of the environmental, social, and governance risks, opportunities or impacts of an entity or financial instrument. They are produced using a defined methodology and ranking system that can combine quantitative analysis with qualitative judgement. ESG ratings may be designed either to inform investors about an entity’s management of material sustainability risks and opportunities, or to pair that assessment with an appraisal of the entity’s management of its broader impacts on society and the environment.

• ESG data products are datasets, indicators or analytics that collect, standardise and generate information on the environmental, social and governance characteristics, performance, exposures, dependencies and impacts of entities or financial instruments. They may cover specific areas, such as climate, or broader ESG matters and can draw on reported figures as well as estimated values. These products help investors and other stakeholders better understand sustainability risks, opportunities, and impacts. Unlike ESG ratings, ESG data products do not, by themselves, express an overall opinion, score or ranking.

Methodologies. Sixty-two per cent of jurisdictions require or recommend ESG rating providers to disclose their methodologies, while 38% set no such requirement. Although 60% require or recommend methodologies to be updated or reviewed, independent reviews are rare, with only India mandating them. Opaque methodologies make it difficult for companies to understand or improve ESG ratings, while sudden shifts after methodology changes or minor public controversies involving the company may undermine investor confidence in rating reliability. Potential improvements include:

• ESG ratings are typically updated annually but on opaque, staggered schedules that hinder comparability. More predictable and transparent update schedules could improve comparability across companies.

• Greater transparency in ESG rating methodologies would build trust and reduce box-ticking. Regulators can help to ensure that disclosures of methodologies enhance service providers’ accountability to their clients without compromising proprietary models, while encouraging sector-specific criteria. However, policymakers and regulators should avoid second-guessing ESG rating methodologies, as doing so could stifle innovation, compromise independence, and lead to uniformity. Instead, they should focus on ensuring transparency, disclosure, and integrity in the development and applications of such methodologies.

Engagement with issuers. Both the EU and India mandate a level of engagement with rated issuers and allow issuers two working days to submit their comments. In Japan, a voluntary code recommendation gives rated entities the opportunity to point out any factual mistakes or inaccuracies. Engagement is not yet addressed in other surveyed jurisdictions, and practices are not standardised across different ESG rating providers. A potential solution for policymakers and service providers could include clearer requirements or recommendations for ESG rating providers’ engagement with issuers. This could provide clarity on avenues for correction mechanisms for ESG ratings, allowing issuers to contest factual inaccuracies through a dedicated and clear process.

Conflicts of interest. Two-thirds of jurisdictions require or recommend ESG rating providers to disclose conflicts of interest and 54% require ownership disclosure. While some jurisdictions mandate firewalls, further oversight may be needed to assess compliance and the effectiveness of internal safeguards.

Registration/authorisation, monitoring and competitive landscape. The EU and India require ESG rating providers to be formally authorised, while all other surveyed jurisdictions rely on voluntary codes and irregular monitoring. Ninety per cent of frameworks do not account for the provider’s size, raising concerns about the proportionality of rules for a market still under development. Calibrating obligations by size and risk could enhance transparency and independence without overburdening smaller providers or deterring new entrants.

1.4. Index providers

Significant or systemic indices. Seventy per cent of jurisdictions regulate index providers, sometimes focusing only on indices deemed significant or systemic. A targeted approach on significant indices supports proportionality, enhancing competition in an already concentrated market, and allows supervisory authorities to better allocate their resources. For example, the EU’s revised Benchmark Regulation of 2025 narrows coverage to critical, significant, and climate-related benchmarks, excluding most non-significant and non-ESG indices that were in scope under the 2016 framework. This regulatory option could be considered by jurisdictions that are planning to regulate all indices in a similar way, regardless of their significance and characteristics.

Fairness and accessibility in index provision. Fairness concerns in the index ecosystem include high licensing fees in some markets, which may restrict accessibility and warrant closer monitoring. Stock exchanges may need to be required, as is the case in India, to provide equal, unbiased, and timely dissemination of data to all index providers at reasonable costs, helping to ensure a level playing field.

Methodologies. Seventy per cent of jurisdictions require index providers to disclose their methodologies, though specific requirements vary. In 64% of jurisdictions, providers must outline consultation procedures for material methodology changes, explain the rationale for such changes and notify users when they occur. The same proportion of jurisdictions requires methodologies to be periodically updated or reviewed by an independent party. To further increase methodology transparency, policymakers and regulators could consider:

• Standardising the minimum notice period that index providers must give market participants before implementing significant or material methodology changes, as well as when market participants are included or excluded from indices. Currently, there are no regulatory requirements regarding the minimum time given to market participants for a material or significant change, and the notice period often varies among index providers.

• Further supervision may be needed where index providers exercise discretion, particularly in ESG indices or during corporate events. Differences in weighting choices and use of third-party versus in-house ESG ratings highlight the need for greater transparency, including disclosure of underlying data and methodologies.