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European securities regulators float mandatory transparency rules for ESG data firms

French and Dutch rulemakers call for a clearer picture on methodologies and internal controls

Two of Europe’s most powerful national securities regulators, France’s AMF (Autorité des Marchés Financiers) and the Dutch AFM (Autoriteit Financiële Markten), have put forward plans for mandatory regulation of all ESG data providers to be overseen by the European Securities Market Authority (ESMA).

The regulators say clear rules for ESG data ‘sustainability-related services’ (SRS) are needed to prevent misallocation of investments, greenwashing and ensure investor protection. 

They propose that the rules should be part of the European Commission’s sustainable finance strategy, the next iteration of which is currently scheduled to be released in March 2021. 

The AMF and AFM have outlined their proposals in a position paper, titled: Call for a European Regulation for the provision of ESG data, ratings, and related services

The regulators argue that new transparency standards on ESG data methodologies are necessary for them to be able to monitor the markets properly, protect investors and ensure that investment in the EU climate-neutral economy transition is truly green

In it, they argue for a mandatory EU regulatory framework for all ESG data, analysis and services sold by what they term “Sustainability-related Service Providers” (SSPs). The framework, they say, would require greater transparency on data collection methodologies by the SSPs. It would also aim to ensure management of conflicts of interest via clear internal control and governance requirements.

Notably, the regulators say SSPs selling services to European companies should be subject to authorisation and supervision by ESMA, and therefore required to operate through an EU-located entity, noting a “risk of dependence upon a limited number of non-European providers”.

Significantly, the two regulators say all ESG-related products/services – not just ESG ratings – should be covered by the regulation, including any provision of ESG data, scores, controversies, scenario analysis, taxonomy-related tools, and investment screening.

The regulators point to recent estimations that the ESG data and services market could more than double to over $5bn by 2025, but they say that the fact it is currently unregulated puts it at odds with similar financial opinions such as credit ratings. 

“ESG ratings are not uniform and can involve different concepts,” the paper says. “Whereas the concept of financial performance and its calculation are now largely embedded in accounting and financial regulation and generally shared by financial market participants, the definition and measurement of non-financial performance are not yet mature and are multifaceted. SSPs adopt different definitions of ESG performance. Indeed, research shows that the correlation between ESG ratings of different providers is quite low, especially when compared to the near 100% correlation of credit ratings.” 

The regulators argue that new transparency standards on ESG data methodologies are necessary for them to be able to monitor the markets properly, protect investors and ensure that investment in the EU climate-neutral economy transition is truly green.

They suggest that the new rules should be adopted through a “step by step approach,” starting with a set of core requirements for SSPs to be reviewed periodically taking into account market developments and, where appropriate, complemented by additional measures.