EIOPA chair voices concerns over ESG ratings, hints at need for regulation

The chair of the European Insurance and Occupational Pensions Authority (EIOPA), Petra Hielkema, has expressed concerns that ESG ratings are being viewed as judgements of how sustainable an asset or activity is rather than a judgement of risk, and hinted that further regulation of the industry may be needed.

Speaking on a panel at the Derivatives Forum Frankfurt last week, Hielkema said: “If you look at ratings right now, they measure risk, which is something different than how sustainable your activity is or the asset is, and I do think that it is appreciated as the latter, and that in itself is a concern.”

She added: “There are many [ESG ratings] out there. They are costly. You need to understand what they really do, how good they are. So I do see that there’s another piece of regulation that might be necessary to get that properly done.”

These concerns echo the findings of a report by the 2 Degrees Investing Initiative last week, where respondents were split on whether ESG ratings should focus on an investment’s ESG risk or sustainability “footprint”. At the same time, a large majority – 80% – said regulators should require clear definitions from providers on the focus of their ratings.

Hielkema briefly touched on ESG exclusions, saying that “we do need to have a discussion” on the topic, not just for investment but also for insurance. While exclusions are a way to deal with risk, they don’t “solve or [don’t] always help financial stability”, she added.

She also suggested that regulators in the EU could learn from the experiences of authorities in the US or Asia on both climate and social issues. US regulators are “very much now in a very active mode” in their work on ESG risk, while Asia “was already on its way”, she said.

When it comes to physical risk, a particular focus for the insurers who fall under EIOPA’s jurisdiction, Hielkema noted: “Depending on where you are in the world, there’s sometimes really good modelling happening already on certain risks. Think about tornadoes and hurricanes in the US or […] flooding in Asia.

“When you look at social, I would say that my colleagues in the US – driven by the Black Lives Matter movement – as a group of supervisors have decided that they want to pay more attention to that. So here I am actually very happy to hear from them.”

In other EU regulatory news, the European Commission has published answers to a number of questions from the European Supervisory Authorities on the interpretation of a number of provisions in the Sustainable Finance Disclosure Regulation.

Among the most significant points made by the Commission are that market participants may only disclose taxonomy alignment of their products where they have reliable data, as they would otherwise risk breaking EU law or other regulations. Where a market participant is unable to collect data, the Commission said, it should indicate a taxonomy alignment of zero. Where the participant “cannot reasonably obtain” the relevant information, it is permitted to make “complementary assessments and estimates” of alignment, but must clearly explain the basis for its conclusions.