‘ESG rating agencies should be regulated’: ESMA chief weighs in on data debate

The Chair of the European Securities and Markets Authority (ESMA), Steven Maijoor, has called for ESG rating agencies to be regulated and supervised appropriately by public sector authorities.

Expressing his personal views, he said that the level of public scrutiny and supervision of ESG ratings “is far from optimal”, adding that the methodologies behind their scoring mechanisms lack clarity and contribute to the risk of greenwashing by not allowing investors to “effectively compare investments which are marketed as sustainable”.

"ESG rating agencies should be regulated and supervised appropriately by public sector authorities"

He set the tone of his speech by alluding to Greta Thunberg’s speech at Davos last month:

“The alarming expression ‘Our house is on fire!’ […] encapsulates the idea that climate change is regarded as the number one risk for the global economy. A fire which will be impossible to contain without the contribution of the financial sector, to help channel investments […] to address the climate crisis.”

Maijoor also weighed in on the debate about the EU taking leadership for creating new sustainability corporate reporting standards, which Commissioner Valdis Dombrovskis initiated recently on the back of the revision of the Non-Financial Reporting Directive. 

Maijoor said that as ESG investing becomes more popular, market participants should be provided “with reliable and comparable disclosure by companies, starting with large issuers”.

He said: “Europe can play a leading role in promoting this consolidation at international level. It would not only be short-sighted, but also detrimental for investors – who typically operate in global financial markets – to build a set of corporate ESG disclosure standards that is only regional.”

Hortense Bioy, Morningstar’s Director of Passive Strategies and Sustainability Research for Europe told RI: “If the objective of regulating ESG rating agencies is to have more uniform ESG ratings, I am not sure it would be a good outcome for investors. Diversity of views is a good thing. That said, the harmonisation and standardisation of corporate ESG disclosure will make ESG ratings more robust in the future. At the moment, a lot of data is estimated, which contributes to the lack of clarity and comparability.”

ESMA published last week a wide-ranging sustainable finance strategy, including its willingness to extend its mandate in this field.

Maijoor reiterated that a consultation on the Disclosures Regulation, which affects institutional investors’ own reporting, will be launched by the end of this quarter.

Closely related to the success of this Regulation is the revision of the NFRD, for which the European Commission is expected to publish a consultation very soon, all part of the European Green Deal.

Last week, RI reported that Japanese investment giant GPIF had called into question ESG assessments, saying “there is space for human judgement on the part of analysts who devise ESG calculations" in the context of index construction.