Regulator advises against changing European credit ratings rules to include sustainability

Advice to the EU Commission from European Securities and Markets Authority

The European Union’s securities markets regulator ESMA has advised against updating the regulations governing credit ratings agencies to include sustainability issues.

ESMA, the European Securities and Markets Authority, says it is “inadvisable” to amend the regulation “to explicitly mandate the consideration of sustainability characteristics in all rating assessments”.

In new technical advice to the European Commission, Paris-based ESMA assessed the level of consideration of environmental, social and governance (ESG) factors in both specific credit rating actions, and the credit rating market in general.

It found that, while credit rating agencies – CRAs in the terminology — are considering ESG factors in their ratings, the extent of their consideration can vary significantly across asset classes, according to each firm’s methodology.

But it stressed that “taking account of ESG factors in credit assessments is distinct from, and should not be confused, with sustainability assessments or sustainability ratings”.

It went on to say that credit ratings “should not be understood as providing an opinion on sustainability characteristics” of the rated entity.“This is neither the purpose of credit ratings, nor would it be consistent with their role and definition under the CRA Regulation.”

“Credit ratings should not be understood as providing an opinion on sustainability characteristics”

This point was also highlighted by ESMA’s Securities and Markets Stakeholders Group (SMSG), which includes academics, market players and users.

According to another ESMA document released this week on guidelines for disclosure by ratings agencies, the stakeholder group “highlighted that credit ratings are fundamentally different from ESG ratings as the two products serve very different purposes”.

ESMA had been tasked by the Commission in March last year to look at the issue in the context of the Action Plan for Sustainable Finance.

The new disclosure guidance will require greater transparency around whether ESG factors were a key driver of the credit rating action. This will allow the users of ratings to better assess where ESG factors are affecting credit rating actions.