How Proxy Advisors and ESG Firms Are Reshaping Global Capital Markets

A quiet shift is changing the way global financial markets work. A new OECD report, The Role of Capital Market Service Providers in Corporate Governance: Proxy Advice, ESG Ratings and Indices, shows how a small group of firms now plays a major role in deciding where money flows and how companies are judged. The report was prepared by the OECD Corporate Governance Committee with input from organisations including MSCI, S&P Global, Institutional Shareholder Services, Fidelity International and Deutsche Aktieninstitut.

The study looks at proxy advisors, ESG rating firms and index providers, all of which help investors make decisions. These firms influence shareholder voting, sustainability ratings and stock market benchmarks. Although they are not directly responsible for managing investors’ money, their recommendations often shape major investment and governance decisions around the world.

Why Proxy Advisors Have So Much Power

Proxy advisors help large investors vote during company shareholder meetings. They study proposals related to executive pay, board appointments, mergers and sustainability issues, then recommend how investors should vote.

According to the OECD, the proxy advisory industry is highly concentrated, with only a few major firms dominating the market. Supporters say these firms improve corporate accountability by helping investors review company decisions more efficiently. Critics, however, argue that some proxy advisors apply the same governance standards across very different countries and companies without considering local business conditions.

The report finds that the regulation of proxy advisors is still weak in many countries. Only around 60% of surveyed jurisdictions have formal rules for these firms. In most places, the focus is mainly on disclosure rather than strict supervision.

Conflicts of interest are another major concern. Some proxy advisors also sell consulting services to the same companies they later evaluate. Regulators worry this could affect the independence of their voting advice. Yet only a small number of jurisdictions specifically require disclosure when these firms provide additional services to companies.

The OECD also highlights concerns about staff expertise and accountability. Most countries do not require proxy advisory firms to meet standards related to analyst qualifications, ethics or independence.

The Growing Influence of ESG Ratings

The report also examines the fast-growing ESG ratings industry. ESG stands for environmental, social and governance factors, which investors increasingly use to judge companies.

ESG rating providers assess how companies perform on issues such as climate change, labour practices and corporate governance. These ratings can affect investment decisions, company reputations and even borrowing costs.

However, the OECD finds that ESG ratings often vary widely between providers. The same company may receive very different scores because firms use different data, methods and assumptions.

The report says the biggest problem is not necessarily the differences themselves, but the lack of transparency behind them. Investors and companies often struggle to understand how ESG scores are calculated or why ratings suddenly change.

Many ESG firms also provide consulting services to companies, creating possible conflicts of interest similar to those seen in the proxy advisory industry. The OECD warns that stronger safeguards and clearer disclosures may be needed to protect trust in sustainable investing.

The European Union and India are highlighted as leaders in ESG regulation. Both have introduced stricter rules requiring ESG rating firms to explain their methodologies, manage conflicts of interest and improve transparency.

Index Providers and the Rise of Passive Investing

Another group gaining influence is index providers. These companies create stock market indices that guide trillions of dollars in passive investment funds and exchange-traded funds.

Their decisions about which companies are included in major indices can significantly affect stock prices and investment flows. As passive investing continues to grow, index providers are becoming more powerful players in global markets.

The OECD notes that the regulation of index providers is generally more developed than the regulation of proxy advisors or ESG rating firms. About 70% of surveyed jurisdictions have frameworks for benchmark providers.

Transparency is the main issue regulators focus on. Many countries require index providers to explain how indices are created and to notify investors when methodologies change. ESG and climate-related indices are receiving particular attention because providers often have wide discretion in choosing sustainability criteria.

The Global Challenge for Regulators

Through case studies on Belgium, Chile and India, the OECD shows how countries are responding differently to the growing power of these market intermediaries. Belgium follows the broader European Union framework, Chile represents a lighter-touch emerging market approach, while India has introduced one of the world’s most detailed regulatory systems.

The report concludes that capital market service providers now sit at the centre of modern finance. Their ratings, recommendations and benchmarks increasingly shape corporate behaviour and investment decisions worldwide.

The challenge for regulators is finding the right balance. Governments want stronger transparency, accountability and conflict-of-interest rules, but they also want to avoid excessive regulation that could reduce innovation or make markets even more dominated by a few global firms.

As investing becomes more data-driven and sustainability-focused, the influence of proxy advisors, ESG rating agencies and index providers is likely to grow even further. The OECD argues that improving oversight of these hidden players will become increasingly important for maintaining trust and fairness in global capital markets.