Featured Product

    ESMA Calls for Legislative Action on ESG Ratings and Assessment Tools

    January 29, 2021

    ESMA issued a letter to EC, sharing its views on the main challenges in the area of environmental, social, and governance (ESG) ratings and assessment tools. In its letter, ESMA highlights the need to match the growth in demand for these products with the appropriate regulatory requirements to ensure their quality and reliability. This issue is linked with the more pervasive one of data quality in the area of sustainable finance, in relation to which ESMA strongly supports the efforts of EC to improve the quality of reported information through various initiatives. These initiatives include the review of the Non-Financial Reporting Directive (NFRD), the regulation on sustainability‐related disclosures (SFRD), and the disclosure requirements under the Taxonomy Regulation.

    The letter builds on the response of ESMA to the EC consultation on renewed sustainable finance strategy, in July 2020, wherein specific issues related to the ESG ratings and assessment tools were raised. In the response, ESMA highlighted issues with the lack of a legally binding definition and comparability among providers of ESG ratings or legal requirements to ensure transparency of underlying methodologies of such ratings. In addition, ESMA highlighted concerns about protection against conflicts of interest that may arise in the business models of these providers, which give rise to the risks of capital misallocation, product mis-selling, and greenwashing. However, no appropriate legal tools exist to address these issues. In the letter, ESMA identifies the following actions that could be taken to address these issues effectively and proportionately:

    • There should be a common definition of ESG ratings that covers the broad spectrum of possible ESG assessments on offer. This would ensure that all existing products that aim to provide an assessment of the ESG profile of an issuer or a security, regardless of the specific measurement objective, are subject to the same basic level of investor protection safeguards. This will also help future-proof any regulatory framework and mitigate against possible obsolescence. In setting up any definitions in this area it will be important to ensure consistency with definitions across other areas of EU capital markets and sustainable finance legislation, including the Taxonomy Regulation.
    • Any legal entity whose occupation includes the issuing of the ESG ratings and assessments should be required to be registered and supervised by a public authority. This would ensure that these gatekeepers of ESG ratings and assessments are subject to a common core of organizational, conflict of interest, and transparency requirements.
    • There should be specific product requirements applicable to the ESG ratings and assessments provided by that entity. These should not necessarily be of the same level of prescriptiveness as those applicable to credit ratings. However, they should be sufficiently stringent to ensure that ESG ratings and assessments are based on up to date, reliable and transparent data sources, and developed according to robust methodologies that are transparent and open to challenge by investors.
    • Any regulatory framework in this area should ensure that larger more systemic entities are subject to a full suite of organizational and conflict of interest requirements that reflect their growing importance in sustainable finance. At the same time, it should be proportionate and adapted to the current market structure to ensure that smaller entities are eligible for certain exemptions from the most resource intensive elements, when this is appropriate. This will allow participation in the market both by well-resourced incumbents as well as the more dynamic start-ups that drive innovation.

    To a large extent, these proposals have been inspired by the requirements of the Credit Rating Agencies (CRA) Regulation, as there are clear parallels between the processes of ESG and CRA rating providers and the objectives pursued by CRA Regulation. In addition to these elements, ESMA encourages that further consideration be given to how any regulatory framework could accommodate ESG ratings and assessments elaborated outside EU. The CRA Regulation could be an informative starting point in this regard. ESMA notes that ESG rating providers can be part of larger groups providing services such as green bond certification and credit ratings. Given this overlap, and to benefit from economies of scale in supervision, ESMA is ready to support possible future supervisory responsibilities in this area.

     

    Related Links

    Keywords: Europe, EU, Banking, Securities, ESG, Sustainable Finance, CRA Regulation, Climate Change Risk, ESG Ratings, EC, ESMA

    Featured Experts
    Related Articles
    News

    EBA Publishes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.

    May 23, 2022 WebPage Regulatory News
    News

    EU Agencies Update LCR Rule and Macro-Prudential Policy Recommendation

    The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).

    May 23, 2022 WebPage Regulatory News
    News

    OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities

    The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.

    May 17, 2022 WebPage Regulatory News
    News

    EBA Proposes Standards to Support Secondary NPL Markets

    The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.

    May 17, 2022 WebPage Regulatory News
    News

    EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution

    The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).

    May 13, 2022 WebPage Regulatory News
    News

    EBA Issues Standards for Crowdfunding Service Providers Under ECSPR

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.

    May 13, 2022 WebPage Regulatory News
    News

    EU to Amend Credit Risk Adjustment Rules; ESAs Submit Queries on SFDR

    The European Council published a draft Commission Delegated Regulation to amend the regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.

    May 13, 2022 WebPage Regulatory News
    News

    EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution

    The European Securities and Markets Authority (ESMA) published a paper that examines the systemic risk posed by increasing use of cloud services, along with the potential policy options to mitigate this risk.

    May 12, 2022 WebPage Regulatory News
    News

    MAS Amends Notice 635 and Issues Second Proposal on Green Taxonomy

    The Monetary Authority of Singapore (MAS) published amendments to Notice 635, which sets out requirements that a bank in Singapore has to comply with when granting an unsecured non-card credit facility to individuals.

    May 12, 2022 WebPage Regulatory News
    News

    EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA

    The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.

    May 11, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8201