Industry Updates

ESMA calls for regulation of ESG rating providers as shortfalls exposed

Move highlights data and transparency issues

Theo Andrew


The European Securities and Markets Authority (ESMA) has said it is seeing “growing momentum” among regulatory bodies to address the issues of ESG rating providers after their shortcomings were again exposed in recent industry feedback.

In a call for evidence, in which the industry body received 154 responses, ESG rating providers were found to have several issues including insufficient granularity of data and complexity and lack of transparency around methodologies.

In particular, ESMA noted a lack of coverage of specific industries and poor interactions with the rating providers when attempting to understand methodologies, the timing of feedback and correction of errors.

In a letter to the European Commission, Verena Ross, chair of ESMA, wrote the regulator is seeing growing support among supervising bodies in several jurisdictions “to address issues such as transparency, governance and conflicts of interest”.

ESMA also highlighted concerns raised around market concentration, with the majority of users dealing with a small number of the same providers.

It noted the market was split between a small number of very large non-European Union (EU) entities and a large number of significantly smaller entities in the EU, with a large number of these clustered in three member states.

“We consider the feedback we have received on the market for ESG rating and data providers 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-EU headquartered providers,” Ross wrote.

“The majority of users of ESG ratings are typically contracting for these products from several providers simultaneously. Their reasons for selecting more than one provider are most notably to increase coverage, either by asset class or geographically, or in order to receive different types of ESG assessments.

“A majority of users contract with a small number of the same rating providers, indicating a degree of concentration in the market.”

In November, the International Organisation of Securities Commissions (IOSCO) said regulators should intensify their focus on the use of ESG ratings and data products as well as their providers in a bid to stamp out greenwashing.

The findings were published following a consultation with the market launched in August, in a bid to tackle the lack of transparency and consistency in data reporting on ESG across geographies.

In the same month, the International Sustainability Standards Board (ISSB), set up by the International Financial Reporting Standards (IFRS) Foundation Trust, came after mounting calls for higher quality and universal disclosure on ESG performance indicators. 

In October, the UK government said it was considering taking a tough stance on ESG data providers by bringing them in under the regulation of the Financial Conduct Authority in a sign that some IOSCO members will look to go further than the board’s recommendations.

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