Norges Bank Investment Management has published its comments on the European Commission’s proposed regulation on ESG ratings.

NBIM has published its views on the proposed regulation and suggested improvements that it sees as needed to improve the market for ESG ratings. The firm says its agrees with the European Commission’s assessment that the ESG rating market suffers from deficiencies which could undermine investors’ confidence in ratings. It also welcomes the Commission’s intention to improve the transparency of ESG ratings, their methodologies and data sources. NBIM also made the following comments:

• The approach taken by ratings providers might not always be apparent to stakeholders, which can cause ESG ratings to be misinterpreted and misapplied. NBIM welcomes the proposed requirements for ESG rating providers to disclose information on the methodologies used in their rating products and information on whether the rating is expressed in absolute or relative values.
• Regarding additional disclosures to users and undertakings, NBIM suggests an additional requirement to disclose the definition of a rated entity’s peer group if the rating is expressed in relative terms.
• Rating providers should publicly disclose their methodologies, data sources, and the weights used to generate overall ESG ratings and be transparent on substantive changes they make to their methodology, and explain the impact these have on the quality, coverage, and distribution of ESG ratings. They therefore welcome the proposed disclosure in Annex III, article 1, on data processes (including data sources, estimation of input data, and frequency of data updates), and on the weighing of both the overarching ESG factors categories and individual E, S and G factors.
• Regarding changes to rating methodologies, NBIM believes that transparency on the methodology update policy (e.g. whether ad-hoc or conducted with a set frequency) and approach to historical ratings (whether these are re-run with updated methodologies) could be more suitable than an obligation to review methodologies at least annually. A mandatory annual update might not be the appropriate frequency for every rating approach, and could potentially lead to decreased comparability of ratings.
• NBIM suggests that the disclosure requirement on changes to the rating methodology is enhanced to enable users to understand the impact that methodology changes can have. They should also disclose the use of artificial intelligence in data estimation, quality assurance, and analysis.
• While acknowledging that engagement with rating providers can be resource-intensive from an issuer’s perspective, NBIM believes that ESG rating providers should provide rated entities with an opportunity to correct any factual mistake, a so-called “right to reply”. This requirement could potentially be built into proposed article 18 on complaints-handling mechanisms, which is currently not specific to rated entities, by adding a reserved policy for assessing feedback from issuers.
• Disclosure of conflicts of interest should not be made only to ESMA but also to users of ESG ratings (i.e., added to Annex III, Article 2).
• Regarding Annex III, Article 2, we would like to seek clarification on the intention behind the requirement to disclose which metrics have been selected as relevant, as part of the more granular overview of methodologies to be provided to users and rated entities. Information on relevance of the various ESG metrics or indicators employed could be inferred through the required disclosure of the weighting methodology and individual weights for E, S and G factors. If the intention is however to enhance transparency on which metrics are being used for a single E, S or G factor, then the text could benefit from clarification.

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