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    ESMA Issues Results of Call for Evidence on ESG Ratings

    The European Securities and Markets Authority (ESMA) published results of its Call for Evidence to gather information on the market structure for environmental, social, and governance (ESG) rating providers in the European Union. ESMA also updated the set of questions and answers (Q&A) on the Benchmarks Regulation, or BMR, with key updates relating to the Q&A section on readily available data according to Article 3(1)(8) of the Benchmarks Regulation.

    The findings from the Call for Evidence show that a total of 154 responses were received and 59 ESG rating providers are active in the European Union. The analysis of the responses further indicated several characteristics and trends as follows:

    • With respect to the ESG rating providers, the structure of the market shows that there is a small number of very large non-European Union providers and a large number of significantly smaller European Union entities. While the legal entities of respondents are spread out across almost half of the European Union member states, a large number of these are clustered in only three member states.
    • Users of ESG ratings are typically contracting for these products on an investor-pays basis from several providers simultaneously. Their reasons for selecting several providers are to increase coverage, either by asset class or geographically, or in order to receive different nature of ESG assessments. The most common shortcomings identified by the users were a lack of coverage of a specific industry or a type of entity, insufficient granularity of data, and a lack of transparency around methodologies used by ESG rating providers. However, the provision of ESG ratings on an issuer-pays basis was also evidenced and more prevalent than anticipated.
    • Entities covered by ESG ratings dedicate at least some level of resourcing to their interactions with ESG rating providers, although the amount largely depends on the size of the rated entity itself. Most respondents highlighted some degree of shortcoming in their interactions with the rating providers, most notably on the level of transparency as to the basis for the rating, the timing of feedback or the correction of errors.

    The feedback received is indicative of an immature but growing market which, following several years of consolidation, has seen the emergence of a small number of large non-European Union-headquartered providers. This market structure bears some resemblance to the structure that currently exists for credit ratings. As a next step, ESMA will continue to support the European Commission in its assessment of the need for introducing regulatory safeguards for ESG ratings.


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    Keywords: Europe, EU, Banking, Securities, Basel, ESG, ESG Ratings, Climate Change Risk, Sustainable Finance, Q&A, Benchmarks Regulation, Reporting, CRAs, EC, ESMA

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