As Flaws in ESG Rating Providers Exposed, ESMA Urges for Regulation

The European Securities and Markets Authority (ESMA) has stated that there is "increasing impetus" among regulatory authorities to address the flaws of ESG rating providers after their shortfalls were again exposed in recent industry feedback.

ESG rating providers were found to have many shortcomings in a request for evidence, which garnered 154 responses, including insufficient granularity of data and complexity, as well as a lack of transparency regarding processes.

ESMA specifically mentioned a lack of coverage of specific industries and poor interactions with rating providers when attempting to understand procedures, feedback timing, and error correction.

Verena Ross, chair of ESMA, wrote to the European Commission that the regulator is seeing rising support among supervising agencies in numerous jurisdictions "to address concerns such as transparency, governance, and conflicts of interest."

ESMA also addressed concerns expressed about market concentration, with the bulk of users engaging with the same providers.

It found that the market was divided between a small number of big non-European Union (EU) firms and a large number of significantly smaller EU entities, with the majority concentrated 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 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.”

The International Organisation of Securities Commissions (IOSCO) stated in November that regulators should increase their focus on ESG ratings and data products, as well as their providers, to combat greenwashing.

The findings were released following a market consultation initiated in August to address the lack of openness and consistency in data reporting on ESG across geographies.

The International Sustainability Standards Board (ISSB), established by the International Financial Reporting Standards (IFRS) Foundation Trust in the same month, arose in response to rising calls for improved quality and universal disclosure of ESG performance indicators.

In October, the UK government announced it was considering toughening up on ESG data providers by bringing them under the Financial Conduct Authority's oversight, indicating that some IOSCO members will move beyond the board's recommendations.

Source: ETF Stream

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