The EU Commission has published proposals for ESG rating providers aimed at increasing transparency for sustainable investments.
The Commission says that the new proposals are for regulation to improve the reliability and transparency of ESG ratings. New organisational principles and clear rules on the prevention of conflicts of interest will increase the integrity of the operations of ESG rating providers.
The proposal will require that ESG rating providers offering services to investors and companies in the EU be authorised and supervised by the European Securities and Markets Authority (ESMA). The Commission will now engage in discussions with the European Parliament and Council.
The EFAMA says that the key elements of the legislative proposal that it supports include:
1. Transparency in data sources, quality, and methodologies. EFAMA recognizes the diverse approaches used by ESG data providers and ESG rating providers but calls for transparency regarding the origin of data, methodologies used, and estimates provided. This transparency will enhance comparability, allow asset managers to align data with their own ESG views, and improve the reliability of ESG assessments.
2. Managing potential conflicts of interest and ensuring robust data governance. To preserve market integrity, the regulatory framework should include requirements for internal controls and governance processes. This will help minimize potential conflicts of interest, especially with ESG index providers, and ensure the reliability and accuracy of ESG data and ratings.
3. International alignment. EFAMA emphasizes the need for international alignment to create a level playing field for EU providers and streamline regulations and standards. Divergent rules and requirements across jurisdictions would increase complexity and hinder the effectiveness of ESG ratings. EFAMA supports following the recommendations of the International Organization of Securities Commissions (IOSCO) in its Report and Call for Action on ESG ratings and data providers.
Chiara Chiodo, Regulatory Policy Advisor at EFAMA, states, “EFAMA believes that a comprehensive regulatory framework covering both ESG data providers and ESG rating providers is essential to ensure reliable and transparent ESG information. By addressing the challenges in the ESG data ecosystem, asset managers and investors will have access to robust information for informed decision-making and compliance with regulatory requirements.”
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