A groundbreaking study recently published in Regulation & Governance casts a revealing spotlight on one of the most pressing dilemmas confronting sustainable finance today: the fragile currency of trust in ESG (Environmental, Social, and Governance) rating agencies. As trillions of dollars funnel into purportedly sustainable investment vehicles, delineating genuine environmental and social impact from superficial “greenwashing” becomes critical. This research, conducted by Agnieszka Smoleńska and Professor David Levi-Faur, pioneers a thorough examination of how regulatory frameworks in the European Union and the United Kingdom are evolving to address this trust challenge by scrutinizing the institutional roles of ESG rating providers.
Traditionally, financial markets relied on credit rating agencies to signal risk and value. In the modern era of sustainability, ESG raters perform an analogous function, translating complex corporate behaviors and policies around environmental stewardship, social responsibility, and governance into simplified scores that investors can digest. Yet, the explosion of interest in sustainable finance has exposed considerable inconsistencies across rating methodologies, lack of transparency, and at times, conflicts of interest jeopardizing the reliability of these scores. The authors point out that these agencies are paradoxically both gatekeepers and a potential source of mistrust, which complicates the regulatory mandate.
What emerges from the study is a sophisticated regulatory approach labeled “enhanced self-regulation.” Unlike traditional command-and-control regulation, which imposes rigid rules and direct government oversight, enhanced self-regulation represents a hybrid model. It delicately balances state supervision with industry-driven standards, leveraging public authority to supervise and verify without suppressing market innovation and flexibility. This model reflects a nuanced understanding that effective trust-building in newly emerging ESG markets requires more than top-down decree; it demands collaboration between the regulator and rating firms as co-creators of credible market infrastructures.
The intricate dynamics of this regulatory framework become even more apparent when contrasting the EU and UK approaches. Within the EU, regulatory efforts tend to focus on integrating ESG rating providers into the wider framework of sustainable finance regulation, emphasizing market integrity through formal oversight and mandatory disclosures. Conversely, the UK model places greater emphasis on industry-led codes of conduct, supplemented by targeted governmental interventions when market failures or crises of confidence arise. Both systems underscore the crucial role of intermediary institutions—not only as technical standards setters but as actors requiring their own accountability and legitimacy.
A key insight from this research involves distinguishing between the processes of trust-building and trust-repair within sustainable finance ecosystems. Trust-building pertains to establishing robust credibility for ESG ratings at the outset, ensuring methodologies are transparent, consistent, and resilient against manipulation. Trust-repair comes into play once that credibility is compromised, such as after revelations of greenwashing or methodological weaknesses. The study illuminates how regulatory tools must be calibrated differently depending on this context, ranging from preventative rulemaking to corrective enforcement and reputational oversight.
Underpinning these regulatory innovations is a broader theoretical understanding of trust as a socio-technical product. Trust in ESG ratings does not spontaneously arise but is actively constructed through institutional design, continuous monitoring, and stakeholder engagement. The authors emphasize that reliability, transparency, and accountability mechanisms are vital—not just in the statistical models or data inputs ESG firms use, but also in how these firms position themselves within the market and public discourse. This dual focus ensures that raters are not mere score calculators but trusted intermediaries bridging complex sustainability imperatives and investor decision-making.
From an investor’s perspective, this research resonates with emerging concerns about sustainability claims being co-opted for marketing advantage rather than substantive impact. If ESG ratings fail to offer dependable guidance, capital may be misallocated, undermining the very objectives of the green transition. Regulatory frameworks that employ enhanced self-regulation offer a nuanced pathway to curb greenwashing by incentivizing higher standards and aligning market incentives with genuine sustainability goals. In effect, these hybrid models reinforce market-led governance mechanisms while simultaneously ensuring public interest safeguards.
The findings also carry profound implications for policymakers and market participants worldwide as sustainable finance transitions from niche practice to mainstream asset class. The study cautions against oversimplified regulatory solutions or assuming that trust will emerge naturally through market competition. Instead, it advocates for deliberate institutional architectures that cultivate trustworthiness through shared norms, transparent processes, and enforceable accountability. This is no small task given divergent stakeholder interests, rapidly evolving standards, and persistent informational asymmetries.
Technically speaking, ESG rating methodologies incorporate multifaceted quantitative and qualitative data streams, covering carbon emissions, labor practices, board diversity, and more. However, variations in data availability, proprietary algorithms, and weighting schemes introduce potential biases and inconsistencies. Regulatory interventions seek to enhance methodological rigor by mandating disclosure standards, establishing common evaluation frameworks, or requiring disclosure of conflicts of interest. Such measures promote comparability and reproducibility, which are foundational to both initial trust formation and the restoration of credibility when doubts arise.
Moreover, the study underlines that the relationship between ESG raters and regulators is inherently symbiotic. Rating agencies generate market signals that shape capital flows and corporate strategies, but regulators rely on these intermediaries to operationalize complex sustainability criteria at scale. Regulatory oversight of the raters themselves becomes a meta-layer of trust governance—ensuring that those entrusted with evaluating sustainability are themselves constrained by norms of impartiality, competence, and transparency. This reverberates into broader debates on the role of private rulemaking in public policy and the governance of epistemic intermediaries in contemporary capitalism.
In closing, the research by Smoleńska and Levi-Faur offers an insightful roadmap for sustaining the momentum of sustainable finance without succumbing to the pitfalls of greenwashing. It articulates how trust, while indispensable, remains fragile and must be meticulously nurtured through thoughtfully engineered hybrid regulatory frameworks. As global investors and regulators grapple with the complexities of climate change, social equity, and governance reform, the lessons from enhanced self-regulation models provide a hopeful blueprint for harnessing market mechanisms in service of genuine sustainability. Without such institutional care, the green transition risks degenerating into little more than a marketing gloss, jeopardizing both environmental goals and investor confidence.
Subject of Research: Not applicable
Article Title: Greenwashing and Trust via Enhanced Self-Regulation: The Case of ESG Rating Providers in Sustainable Finance
News Publication Date: 18-Dec-2025
Web References: http://dx.doi.org/10.1111/rego.70114
Keywords: Environmental economics, Political science, Social research, Behavioral economics, Finance, Market economics
