Brussels wants to place ESG data providers under the supervision of the financial watchdog, the European Securities and Markets Authority (ESMA). The proposal aims to address concerns about transparency and potential conflicts of interest in the creation of ESG ratings. It is part of a new package of sustainable finance measures presented by the European Commission on June 13th. The package also includes new criteria for the EU taxonomy, necessary for reporting under the Sustainable Finance Disclosure Regulation (SFDR). The proposal requires approval from the European Parliament.
To ensure reliability and comparability of ESG ratings, Brussels suggests that ESG data providers should operate under the umbrella of ESMA, the European financial markets regulator. Currently, there is a lack of clarity on how ESG ratings are determined, and as long as ESG data providers offer advice, sell credit ratings, and create benchmarks, conflicts of interest may arise. Mairead McGuinness, European Commissioner for Financial Services, Financial Stability, and Capital Markets, expressed these concerns.
ESG ratings from entities such as S&P Global, Moody’s, MSCI, and Morningstar serve as guidelines for trillions of euros in sustainable investments. If the rules come into effect, these entities may be required to divest a portion of their activities to be recognized as independent ESG rating providers by Brussels. Failure to comply with the rules could result in fines of up to 10% of their annual net turnover.
The European Fund and Asset Management Association responded to the proposal, stating that «trust in external ESG data and ratings without sufficient regulation poses risks for fund managers.»
MSCI ESG Research, one of the largest players in the market, stated that it was assessing the implications for the company and its products while maintaining a «culture of independence and transparency» in providing ratings.
S&P Global expressed belief that a «consistent implementation» of recommendations from IOSCO, the global securities regulator, would support products with ESG ratings and help prevent fragmentation between jurisdictions.