The governance of ESG ratings and benchmarks (infomediaries) as gatekeepers:exit, voice and coercion

Given the complexity of sustainability issues in finance, ESG financial market information intermediaries have emerged as a way to overcome asymmetries between firms and investors. These infomediaries offer various types of ESG ratings, scores and benchmarks (indices). Like traditional index funds and credit ratings, ESG infomediaries have a gatekeeper function in the market. However, their role is arguably even more complex given the multi-faceted nature of the "E", "S"and "G"and the difficulty of processing the vast amounts of information supplied by issuers. In this context, however, greenwashing risks loom large. To fully capture the governance uses of ESG infomediaries, this article develops a framework that differentiates between exit-, voice- and coercion-enabling regulatory instruments. The regulation of ratings and benchmarks may facilitate the "exit"of customers and investors from firms that fall short of ESG credentials through market mechanisms, give "voice"to critical constituencies or introduce mandatory "coercion". Our analysis identifies the different ways in which existing and developing EU rules shape the supply and demand for ESG financial market infomediaries and explores the "external governance"levers with regard to firm sustainability.