ESMA calls for action on ESG ratings

The European Securities and Markets Authority (ESMA) has written to the European Commission urging them to bring in rules to regulate ESG ratings.

on 28 January ESMA wrote that new EU rules are needed for ratings to avoid greenwashing. In a statement it said, “The market for ESG ratings and other assessment tools is currently unregulated and unsupervised. When combined with increasing regulatory demands for consideration of ESG information, there are increased risks of greenwashing, capital misallocation and products mis-selling.”

The letter also said that, “Compared with credit ratings, ESG ratings display very low levels of correlation across providers, leading to issues down the investment value chain. This is
problematic in the context of ESG benchmark construction, with the choice of ESG rating
provider significantly impacting the constituents of those indices. Similarly, the fact that companies in highly polluting industries can obtain high environmental scores from some ESG rating providers can lead to investor confusion and highlights the need for greater transparency and the development of standardised definitions”.

ESAM went on to propose a potential future legal framework based on the following actions:

A common legal definition should be developed for an ESG rating that captures the
broad spectrum of assessment tools that are currently available in the market.

Any legal entity whose occupation includes the issuing of these ESG ratings and
assessments should be required to be registered and supervised by a public authority.

There should be specific product requirements applicable to the ESG ratings and assessments provided by that entity.

Any regulatory framework in this area should ensure that larger more systemic entities
are subject to a full suite of organisational and conflict of interest requirements that reflect their
growing importance in sustainable finance.