ESMA Announces 'Call For Evidence' Result on ESG Ratings

The European Securities and Markets Authority (ESMA), the EU's securities markets regulator, issued a letter to the European Commission (EC) detailing its results from the Call for Evidence to collect information on the market structure for ESG rating providers in the European Union (EU).

ESMA received 154 responses and identified 59 ESG rating providers operating in the EU. The analysis of the responses revealed several more traits and tendencies.

ESG rating providers – the structure of the market shows that there is a small number of very large non-EU providers and a large number of significantly smaller EU entities. While the legal entities of respondents are spread out across almost half of the EU Member States, a large number of these are clustered in a small number of Member States.

Users of ESG ratings generally contract for these products from multiple vendors simultaneously on an investor-pays basis. Their selection of many suppliers is motivated by a desire to increase coverage, either by asset class or region or to acquire ESG analyses of varying types.

Users reported a lack of coverage of a given industry or entity type, insufficient granularity of data, and a lack of transparency on the techniques employed by ESG rating providers as the most prominent deficiencies.

Nonetheless, the supply of ESG ratings on an issuer-pays basis was observed and more frequent than expected.

Generally, users of ESG rating contract for these products simultaneously from numerous vendors on an investor-pays basis. Their choice of numerous vendors is motivated by a desire to enhance coverage, either by asset class or area, or to receive diverse ESG studies.

Users cited a lack of coverage of a certain industry or organisation type, insufficient granularity of data, and a lack of transparency regarding the methodologies used by ESG rating providers as the most glaring weaknesses. The delivery of ESG ratings on an issuer-pays basis was nonetheless noticed and more often than anticipated.

Following several years of consolidation, a small number of big non-EU-based suppliers have emerged, as shown by the received feedback. ESMA will continue to advise the EC on the necessity of adopting regulatory protections for ESG ratings.

Source: ESMA

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