Efama Wants ESG Data, Ratings Standardised
The European Fund and Asset Management Association (Efama) recently published a comprehensive policy stance, highlighting the imperative need for a regulatory framework governing Environmental, Social, and Governance (ESG) ratings and data providers.
In response to the burgeoning significance of ESG considerations in asset management, Efama, based in Brussels and representing the European investment management and asset manager community, unveiled its position paper on September 1, 2023.
Within this dynamic landscape, characterised by the Sustainable Finance Disclosure Regulation, Corporate Sustainability Reporting Directive, EU Taxonomy Regulation, and Shareholders Rights Directive (SRD II), alongside established investment processes such as Ucits and AIFs, asset managers have increasingly turned to external ESG data and ratings providers.
This shift has given rise to a series of challenges that underscore the necessity for a robust regulatory framework governing ESG data and ratings, as argued by Efama.
Efama's legislative proposal, which enjoys support from industry stakeholders, addresses several pivotal issues. It advocates for augmented transparency, requiring ESG rating providers to clearly delineate their objectives, methodologies, data sources, and ranking systems.
Such transparency, according to Efama, will empower investors to make more informed decisions. The proposal also places a strong emphasis on rigorously managing potential conflicts of interest, thereby enhancing the credibility and reliability of ESG ratings.
Moreover, Efama calls for the establishment of a formal complaint mechanism, offering a platform for individuals and entities to voice their concerns, thus promoting accountability within the industry.
Additionally, the association advocates for fair, transparent, and cost-based fee structures for ESG ratings. The European Securities and Markets Authority is granted the authority to intervene in cases of fee violations, further fortifying the regulatory and supervisory framework encompassing registration, authorisation, and organisational requirements to safeguard the integrity of the ESG data market and mitigate the risk of greenwashing.
While Efama broadly supports the proposed legislation for ESG ratings and data providers, it also identifies several areas that warrant improvement for the establishment of a more comprehensive and effective regulatory framework.
Firstly, Efama underscores the significance of encompassing not only ESG ratings but also raw data providers in the legislation, as raw data, devoid of evaluative layers, forms the foundational basis of all ESG ratings and currently lacks standardised reporting and auditing protocols.
Secondly, Efama calls for a clearer definition of "ESG rating" that aligns with international standards. The association also advocates for a clear differentiation between ESG ratings and data products to prevent any potential confusion.
Thirdly, Efama seeks an exclusion clause to prevent overlaps with existing regulatory frameworks, particularly concerning ratings, scores, or data provided by regulated financial entities.
Fourthly, Efama urges lawmakers to mandate greater transparency in fee structures for ESG ratings, aiming to curtail opaque practices and fee inflation.
Lastly, the association pushes for strengthened transparency requirements, aligning with recommendations from the global regulators club Iosco. These requirements encompass the disclosure of data sources, key performance indicators, measurement methodologies, and the scope of assessments.
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