Eurosif, Dutch and French regulator responses to ESG ratings consultation suggest split

Issues addressed include the scope of regulation, suitability of ESG ratings for the retail market and market standardisation.

Initial public feedback to a European Commission (EC) consultation suggests key differences among stakeholders about which ESG data products should be regulated by the bloc.

Eurosif, the de facto trade body for the EU ESG sector, has called for regulators to focus on ESG ratings in the first instance, while monitoring other ESG-related data services such as those focused on temperature scoring, taxonomy alignment and tracking adverse impacts.

According to the body, incoming EU disclosure regimes such as ESG fund and entity-level reporting, taxonomy reporting and corporate sustainability reporting will likely improve the quality of company-level ESG data, and products and services which are built on those datasets.

A decision on whether to regulate the broader ESG data market should only be made “after the adoption of mandatory corporate sustainability reporting frameworks”, said Eurosif. Responsible Investor understands that Eurosif’s position was informed by an internal advisory panel of asset owners, managers and service providers.

In contrast, financial market regulators from France (AMF) and Holland (AFM) jointly backed an expansion of the regulatory scope to encompass broader ESG data-related products.

The AMF said that regulation should not be limited to ESG ratings but “must cover the entire range of ESG data, ratings and services … [as] the issues identified are common to all these products”. This was echoed by the AFM, with the proviso that any regime is “proportionate towards both bigger and smaller market parties”.

However, all three entities stressed that the main objective for regulating the sector must be to improve transparency in relation to the methodologies that underpin ESG ratings, data sources and potential conflicts of interest at the providers’ corporate level. These address longstanding concerns, which have been flagged by a broad range of users and regulators, including both AMF and AFM, and most recently by IOSCO, which pushed for ESG data and ratings to be placed under the remit of national securities regulators.

But complete standardisation of methodologies must not be the aim of regulators, the three entities said, due to ESG research not being mature enough and the necessity for a diversity of opinions.

In addition, Eurosif said: “The vast majority of professional investors understand and appreciate the complexity and diversity currently on offer in the market…We would caution against any idea that ESG ratings should or will become mainstream for retail investors.”

But a joint submission made by the Climate Finance Fund, Croatan Institute and the Credit Ratings Research Initiative has instead suggested that a recent influx of retail investors means they will inevitably have to “navigate ESG viewpoint diversity for the foreseeable future”.

Regulators should instead develop a series of “minimum safeguards” said the think tanks, comprising disclosures on how ratings are funded, questionnaires used to inform the ratings, the use of absolute impact and not relative metrics, and preventing the use of an “issuer pays model” as this could give rise to conflicts of interest.

The submissions were made in response to a three month-long EC consultation on the potential need for regulatory intervention within the ESG ratings sector, which concludes today. While feedback has not yet been made public, Eurosif, AMF, AFM and the three think tanks separately published their responses.

It comes ahead of the release of the world’s first code of conduct for ESG data providers, which is expected to be published by Japan’s Financial Services Agency in draft form in the next few weeks.

Up to this point, ESG ratings and data products providers have not generally been subject to regulatory oversight, despite wielding enormous influence over investment allocation decisions fuelled by a growing trend to invest in accordance with sustainability principles.