ESMA All Set to Regulate ESG Ratings
A Brief Summary
The European Union's securities watchdog opened an investigation into the bloc's fast-growing but mostly unregulated industry for environmental, social, and governance (ESG) company ratings. Using ESG ratings on corporations as a reference to their 'green' credentials, trillions of dollars have flowed into sustainable investments throughout the world.
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Investors are increasingly incorporating ESG concerns into their investing process, yet the actions and operations of ESG data, service, and rating providers are usually unregulated by markets and securities authorities.
Over the last few months, there have been increasing calls for the sector to be regulated. Early last year, ESMA sent a letter to Mairead McGuinness, the European Commission's financial services coordinator, warning that the ESG ratings sector's existing unregulated status and lack of transparency constituted a risk to investors. The Commission announced a new Sustainable Finance Strategy in July 2021, which included a commitment to enhancing the reliability, comparability, and openness of ESG ratings, and urged ESMA to begin investigating market participants. In November, IOSCO, a standards-setting organisation for securities regulators, recommended authorities to focus on boosting transparency in the ESG ratings and data arena, as well as to begin implementing regulatory monitoring.
The new exercise is intended to provide ESMA with "a picture of the size, structure, resourcing, revenues, and product offerings of the different ESG rating providers operating in the EU," as well as feedback from users of ESG ratings and companies covered by the ratings, according to an ESMA call for evidence issued lately. Market participants' views on the relevance of ESG ratings to financial markets, the level of risk the ratings provide to financial stability and investor protection, and satisfaction with transparency into the methodologies and data sourcing used for the ratings are among the topics covered in the consultation. Responses to the request for evidence are due by March 11, and ESMA plans to send the material to the Commission in Q2 2022.