The OTM discusses several limitations of ESG ratings, noting that regional disclosure disparities can create systematic bias:

“ESG rating providers tend to favor companies in markets with higher disclosure requirementsdue to the availability and quality of data, which can inadvertently penalize firms in jurisdictions with limited reporting frameworks.”

It elaborates that companies in the EU or North America often receive higher ratings compared to peers in emerging markets, not necessarily because of better performance but due toinformation asymmetry.

Therefore, the recognized bias is in favor of — not against — companies in regions with robust reporting regimes, implying that those inregions with lower requirementsare disadvantaged. Thus, the correct answer isoption C, describing that bias accurately.

????Reference:2021-Final-Book.pdf, Chapter 7 — ESG Ratings, Data Quality, and Methodology Limitations.