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This is an extremely important question. Based on survey results, I will organize the structural problems into three layers to answer you.

The "Power Structure" of ESG Ratings and Structural Inequality -- A Critical Analysis

① Who "Decides" Rating Criteria?

Private companies effectively hold the rating standards

There are reportedly over 600 ESG rating agencies worldwide, reflecting the expansion of ESG investment and the lack of unified standards and frameworks.

The major players are a small number of Western-based private companies: MSCI, S&P Global, Sustainalytics (Morningstar subsidiary), Refinitiv (LSEG Group), and CDP. These entities function as "informal power institutions" without public authority that effectively control global capital flows to corporations.

The divergence in standards is severe

The same company often receives significantly different ratings from different evaluation agencies. Divergence occurs because: the range of evaluation items differs by agency, weighting of items varies, and the methods for estimating missing data differ. Unlike credit ratings, the correlation between agencies is low.

A company might be rated as "insulated from ESG risks" by one agency while simultaneously being rated as "dangerously exposed to risks" by another.

② Who Verifies and Supervises?

Current Status in Japan: Legal regulation barely exists

ESG evaluation and data provider agencies currently lack specific legal business regulations or definitions, making the scope of action code adherence requirements problematic.

In Japan, regulation is limited to requesting adherence to "voluntary codes of conduct" rather than legal frameworks—a system with weak enforcement.

International developments: EU and others lead the way

Europe is introducing regulations requiring ESG assessment service providers operating in the region to undergo authorization and supervision by the European Securities and Markets Authority (ESMA). A provisional agreement was reached between the EU Council and European Parliament in February 2024. The UK and Singapore employ "codes of conduct" similar to Japan's approach, with specific regulations and norms continuing to be debated globally.

IOSCO published a "Final Report on ESG Indices Used as Benchmarks" in November 2025, offering guidance for improving transparency and credibility. However, this lacks legal binding force.

The fundamental problem of conflicts of interest

There is growing concern about conflict-of-interest responses, particularly where rating agencies provide paid consulting services to evaluated companies. This creates the same structural contradiction found in credit rating agencies: the institution providing ratings also derives consulting income from rated companies.

③ Mechanisms Creating Structural Disadvantage for SMEs and Emerging Countries

This is the most serious problem. Multiple studies demonstrate "systemic discrimination."

▌"Disclosure capacity" is rated over "actual performance"

Larger companies with resources to comprehensively collect and process rating data tend to achieve higher scores. Since these ratings heavily depend on company-disclosed non-financial information, scores reflect what companies say rather than what they do or plan to do. Scores are based on clearly stated policies.

Even companies with genuinely excellent initiatives receive low evaluations if information disclosure is insufficient. Consequently, companies that excel at disclosure receive high ratings while companies with strong actual performance but weak disclosure receive low ratings. This disadvantage is particularly pronounced for SMEs and emerging companies due to underdeveloped disclosure systems.

▌Structural exclusion of SMEs

ESG rarely generates short-term profits, and the burden of implementation and operation is substantial for SMEs and local enterprises with limited capital. ESG initiatives particularly require significant investment, forcing under-capitalized companies to rely on borrowing and increasing management burden.

Moreover, suppliers—particularly SMEs—face repeated requests from multiple client companies using different formats and asking different questions, preventing focus on core business, creating field confusion and audit fatigue, imposing enormous operational burden.

▌Emerging market companies rated approximately 16% lower (empirical research)

Policymakers in emerging markets are increasingly concerned that ESG scoring companies based in developed nations are "unfairly penalizing" their domestic companies. Research using Refinitiv's comprehensive global ESG database shows that ESG scores of companies in developing countries are approximately 16% lower in standard deviation ratio compared to developed country enterprises.

This "score gap" is caused by implicit global industry benchmark assumptions embedded in Refinitiv's ESG rating methodology, which fails to appropriately consider the domestic priorities of emerging markets, systematically disadvantaging their companies.

▌"Income bias"—a structural flaw

Research indicates that ESG frameworks are influenced by "deep-rooted income bias," advantaging higher-income developed countries. Consequently, ESG scores tend to reinforce the status quo and further disadvantage already low-scoring countries.

Evidence shows that ESG mainstreaming reduces capital flows to emerging and developing markets (EMDE). For example, the weighting of emerging markets in MSCI's EM ESG Leaders Index declined from 68.2% in 2018 to 62.9% in 2022.

▌Rating frameworks themselves are designed in developed-country contexts

In emerging markets, companies face opaque, sometimes contradictory rating methodologies poorly adapted to local institutional realities. Global ESG standards create pressure for formal compliance, increasing greenwashing risk and widening the gap between disclosure and actual implementation.

In developed markets, disclosure is mandatory or strongly encouraged, with high data availability. Conversely, emerging markets have weaker audit standards, creating measurement errors and bias. Additionally, weak law enforcement and high corruption risk alter how ESG affects financial performance.

④ Overall Picture of Structural Problems (Summary)

Supplementary: Questioning the Premise Itself That "ESG is Good"

Importantly, ESG ratings for companies do not necessarily measure the actual environmental or social impact those companies create. Rather, they evaluate how companies manage ESG-related risks and opportunities at present.

The scenarios rating agencies assumed—"strengthened ESG policy," "declining fossil fuel demand," "renewable energy proliferation"—diverge significantly from reality: governments have not enacted strict ESG policies or regulations; fossil fuel demand has not declined but increased; and fossil fuel investments have not become stranded assets.

ESG scores are not "a correct indicator anyone can see," but rather rating systems embedding specific values, political-economic contexts, and developed-country perspectives. Both investors, policymakers, and enterprises need to recognize this.

ESG (Environmental, Social, and Governance) investment ratings and evaluations are primarily conducted by specialized rating agencies. Below is an explanation of the basic mechanisms.

Rating Criteria Determination

1. Rating Agencies: Representative agencies include MSCI, Sustainalytics, and FTSE Russell. These agencies establish their own criteria and evaluate corporations.

2. Criteria Content: Considerations include environmental protection measures, worker rights, corporate governance, and ethical business practices, spanning diverse factors.

Verification

1. Internal verification: Rating agencies themselves collect and analyze data, conducting evaluations.

2. Third-party evaluation: In some cases, external third parties may verify evaluation validity, though this varies among rating agencies.

Structures Creating Disadvantage for SMEs and Emerging Countries

1. Information access differential: Large enterprises can provide comprehensive data, while SMEs often possess limited resources for gathering required information.

2. Standard-setting: Criteria are frequently constructed from developed-country perspectives, potentially disadvantaging emerging market enterprises. For example, companies may struggle adapting to rating standards due to regulatory differences.

3. Transparency and reporting capability: Large enterprises have developed reporting infrastructure, while SMEs and emerging market enterprises frequently lack such systems.

Given these structural challenges, rating standards are being reviewed and evaluation from diverse perspectives is progressing. Through these efforts, increased consideration for SMEs and emerging market enterprises is anticipated.

In ESG investment, ESG ratings—which affect corporate capital flows—are conducted using the criteria of rating agencies. However, the setting and verification of these criteria, along with the structural disadvantages faced by SMEs and emerging countries, have become subjects of international discussion and regulation.

Rating Criteria Determination and Verification

ESG rating criteria are determined and verified primarily by the following entities:

1. ESG Rating Agencies

• ESG rating agencies such as MSCI, S&P Global, Sustainalytics, and FTSE Russell develop their own evaluation methodologies and rate corporate ESG performance based on them.
• These evaluation methodologies are designed based on diverse information sources: international norms, guidelines, legal regulations, social demands, publicly disclosed corporate information, data from third parties (governments, civil society, media), and analysis of misconduct.
• Rating agencies establish evaluation themes (key issues) for each "E (Environment)," "S (Social)," and "G (Governance)" domain, defining specific ESG indicators (quantitative and qualitative) linked to these themes.
• For example, MSCI selects 2 to 7 key issues depending on industry sector and performs relative evaluation on a 7-point scale from AAA to CCC.
• The evaluation process includes resource collection and analysis, key issue identification and scoring, weighting, relative evaluation within industry, and committee review. Some rating agencies state they do not provide consulting to improve corporate ratings to maintain evaluation fairness.

2. Regulatory Authorities and International Organizations for Supervision and Verification

• As ESG evaluation importance has increased, regulatory movements targeting ESG rating agencies have accelerated worldwide.
• The European Union (EU) has introduced the "ESG Rating Activities Regulation (Regulation (EU) 2024/3005)" applicable from July 2, 2026. This requires ESG rating agencies to establish governance, independence, conflict-of-interest management, and transparent evaluation methodologies, with direct supervision by the European Securities and Markets Authority (ESMA).
• The United Kingdom will enforce regulations by June 29, 2028 (Financial Services and Markets Act 2000 (Regulated Activities) (ESG Ratings) Order 2025), bringing ESG rating agencies under financial services regulation. The Financial Conduct Authority (FCA) holds regulatory authority, aiming to improve evaluation process validity, accountability, comparability, transparency, reliability, and conflict-of-interest management.
• These regulatory frameworks are based on recommendations published by the International Organization of Securities Commissions (IOSCO). This aims to achieve international interoperability and improved ESG evaluation credibility.
• In Japan, the Financial Services Agency has indicated an "Action Code for ESG Rating and Data Providers," with standardized corporate disclosure and increased evaluator transparency identified as key issues.

Mechanisms Creating Structural Disadvantage for SMEs and Emerging Countries

ESG evaluation systems contain structural challenges that disadvantage SMEs and emerging countries.

1. Ways SMEs are disadvantaged

• Underdeveloped information disclosure systems: ESG ratings heavily depend on corporate public information. SMEs frequently have less developed disclosure systems like sustainability reports and integrated reports compared to large enterprises. Even with genuinely excellent initiatives, insufficient disclosure frequently fails to be reflected in ratings.
• Resource shortage: ESG information collection, analysis, and reporting require specialized knowledge and human/financial resources that SMEs often lack.
• "G" (Governance) challenges: SMEs sometimes have insufficient management philosophy and compliance/ethics policies, disadvantaging them in ESG evaluation's "governance" dimension.

2. Ways emerging countries are disadvantaged

• Low disclosure standards and language barriers: Emerging market companies often operate under lower sustainability disclosure standards, with particularly insufficient English-language disclosure, hindering international evaluators' information access.
• Shortage of sustainability specialists: Fewer staff specializing in sustainability compared to financial reporting hampers sufficient information disclosure.
• Non-uniform reporting standards: Lack of consensus on which reporting standards to follow presents challenges.
• Underdeveloped domestic capital markets and capital shortage: Emerging nations frequently have underdeveloped domestic capital markets with limited sustainable finance private capital flows. Capital shortages for required climate action are also noted.
• Opaque regulation and policy administration: Opaque regulation and policy administration complicate long-term business planning and create unfavorable environments for climate-related businesses.
• Low ESG ratings and capital procurement difficulty: These factors result in emerging market companies receiving low ESG ratings and facing difficulties securing ESG fund capital.

Addressing these structural disadvantages requires: strengthened information disclosure systems and ESG management implementation in SMEs and emerging countries; support from developed nations; development of finance schemes suited to emerging markets; and evaluator methodology transparency improvement and flexible responses.

ESG rating criteria are primarily determined independently by private rating agencies. Major agencies include MSCI, Morningstar Sustainalytics, S&P Global, ISS, FTSE Russell, Bloomberg, and LSEG, each developing and operating their own proprietary methodology.

These criteria identify primary "materiality" themes for E/S/G (Environment/Social/Governance) based on sector and industry, weighting them for scoring. International frameworks referenced include GRI, SASB (integrated into ISSB), and TCFD, though indicator selection, weighting, and calculation formulas remain each agency's discretion.

Internally, methodology committees develop, review, and approve standards, conducting annual reviews and stakeholder consultations (e.g., MSCI). From July 2026 onward, ESG rating providers within EU jurisdiction fall under European Securities and Markets Authority (ESMA) supervision, with regulations governing methodology governance, transparency, and conflict-of-interest management, though not standardizing or approving methodologies themselves, maintaining diversity and competition.

Verification primarily involves internal quality control by agencies and data confirmation/appeal opportunities by companies. Data sources mix corporate disclosure materials, public information, media and NGO information, and imputed data. Researchers note that "more than half is estimated data rather than verifiable actual data."

Companies receive prior notice and opportunity to request data confirmation or correct factual errors (e.g., Clarity AI notifies over 30,000 companies and conducts formal reviews). Some cases include third-party assurance, though no universal independent verification bodies exist. Rating credibility depends on agency internal controls and transparency disclosure.

Research and expert commentary document that SMEs and emerging countries face structural disadvantage mechanisms.

• For SMEs: SMEs possess fewer resources and systems for ESG data disclosure compared to large enterprises, with coverage (rating universe) declining sharply. Market-size bias (favoring large enterprises), disclosure bias (rewarding disclosure quantity), and industry benchmark effects produce lower scores. Ratings typically build from large-enterprise-centered data, disadvantaging small, mid-cap, and growth companies.

• For emerging countries and developing nations: Global industry benchmarks constructed using developed-country standards inadequately reflect local institutions, priorities, and regulatory environments, causing systematically lower scores (Refinitiv data shows approximately 16% lower tendency versus developed countries). Country risk factors and income-level correlation are noted, with ESG capital flows to emerging nations (below 10% of global total) severely misaligned with their world GDP share (approximately 58%).

These represent "structural" rather than "intentional" biases, originating from data availability limitations, disclosure practice gaps, and global unified benchmark constraints. Some agencies propose dual-scoring approaches (global versus domestic benchmarking).

By 2026, ISSB (International Sustainability Standards Board) IFRS S1/S2 standards are mandatory or adopted across 21+ jurisdictions (covering 60% of global GDP), including emerging markets like Japan, Australia, Singapore, Brazil, and Nigeria. This enables disclosure standardization and data quality improvement, offering medium-term inequality mitigation potential, though immediate resolution remains incomplete.

ESG ratings represent only one investment decision factor; agencies show substantial methodological variation warranting attention. Consulting each agency's methodology documents and latest regulatory developments is advisable.