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EFAMA
Today the European Parliament voted in favour of a new ESG ratings regulation, which is a significant move towards providing investors with transparent and dependable ESG-related ratings information. Going forward, there will be much clearer mandatory disclosures on E, S and G factors, their respective weightings, and methodologies used. ESG rating providers will also not be allowed to provide credit rating, auditing or consultancy services to avoid conflict of interest.
ESG ratings providers based in the EU will now be authorized and supervised by the European Securities and Markets Authority (ESMA) and those from outside the EU will require endorsement, recognition or equivalence to provide their services within the EU. In the case of financial market participants whose activities are already subject to regulatory governance and disclosure requirements, legislators have gone with a balanced approach for internally produced ratings which recognises that these differ in nature and use compared to those offered by external ESG ratings providers. This pragmatism will prevent duplication with existing legal obligations while still considering the need for transparency.
What about other types of ESG data products?
While we acknowledge the significant progress made, there is unfortunately still a gap when it comes to regulating other ESG data products in the EU. The International Organization of Securities Commissions (IOSCO) and ESMA have both stressed the need for robust regulatory frameworks that include all ESG data products, to combat greenwashing and uphold transparency in ESG reporting. In the UK, an industry led working group convened by the Financial Conduct Authority (FCA) developed a code of conduct for both ESG data and ratings providers. We would urge EU legislators not to wait for a future review of the ESG ratings regulation, but to develop a regulatory framework or a code of conduct for third party ESG data products as soon as possible.
Chiara Chiodo, Regulatory Policy Advisor at EFAMA, commented: “Transparent and complete ESG information is key to fully empowering investors to make confident decisions when choosing financial products with sustainability features. Covering ESG ratings in this regulation is a necessary step forward to drive the transition towards a greener economy. Hopefully EU policymakers will be looking at remaining ESG data issues when setting their priorities to boost the Capital Markets Union during the next legislative mandate.”
