July 18, 2019

ESMA published the technical advice on sustainability considerations in the credit rating market, along with the final guidelines on disclosure requirements applicable to credit ratings. ESMA, in its advice, has assessed the level of consideration of Environmental, Social, and Governance (ESG) factors in the credit rating actions in specific and the credit rating market in general. The guidelines on disclosure requirements for credit ratings are intended to improve the overall quality and consistency of the information that is disclosed following a credit rating action. ESMA will consider these guidelines for the purpose of its supervision as of March 30, 2020.

The technical advice provides context on the role of credit ratings in EU legislation and offers an overview of the consideration of ESG factors in credit ratings. It also discusses the extent to which the consideration of factors classified as ESG was evidenced within two samples of specific credit rating actions as well as discusses the possible regulatory developments and their relevance. The technical advice found that, while credit rating agencies (CRAs) are considering ESG factors in their ratings, the extent of their consideration can vary significantly across asset classes, according to the methodology of each CRA. However, given the specific role that credit ratings have in the EU regulatory framework for the purposes of assessing credit risk, it would be inadvisable to amend the CRA Regulation to explicitly mandate the consideration of sustainability characteristics in all rating assessments. Instead, ESMA proposes for EC to assess whether there are sufficient regulatory safeguards in place for other products that will meet the demand for pure sustainability assessments.

Among CRAs, ESMA has noted an inconsistency regarding the information that is disclosed in accordance to these requirements. Consequently, ESMA believes that it would be beneficial to collate a set of good practices in a single guidance document covering the disclosure requirements that are applicable to credit ratings’ press releases and reports. The guidelines:

  • Provide detailed guidance about what CRAs should disclose when they issue a credit rating. This will ensure a better level of consistency in terms of the critical information included in the press releases of CRAs
  • Require greater transparency on whether ESG factors were a key driver of the credit rating action. This will allow the users of ratings to better assess where ESG factors are affecting credit rating actions.

The final report on the guidelines contains a summary of the feedback received to the consultation paper on guidelines on disclosure requirements applicable to credit ratings, alongside the responses of ESMA. Annex I to the report contains the final guidelines on disclosure requirements, Annex II to the report contains a cost-benefit analysis of the guidelines, and Annex III to the report contains the response of the Securities and Markets Stakeholders Group of ESMA to the consultation paper.

 

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Keywords: Europe, EU, Banking, Securities, CRAs, Disclosure Requirements, Technical Advice, Credit Ratings, ESG, Sustainability, Guideline, EC, ESMA

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