When a securities regulator puts together a ‘position paper’ for politicians it’s because it wants it to be noticed.
When two securities regulators get together to do it, it’s because they really want it to be noticed.
This is why the ESG data world should sit up and pay attention to this week’s announcement by two of Europe’s most powerful country securities regulators, France’s AMF (Autorité des marches financiers) and the Dutch AFM (Autoriteit Financiële Markten).
The two regulators have put forward plans for mandatory regulation of all ESG data service providers to be overseen by the European Securities Market Authority (ESMA).
And the calls have received backing from EFAMA, the lobby group of the European investment management industry, giving added impetus.
Giorgio Botta, EFAMA Regulatory Policy Advisor, said: “Asset managers wish to encourage the ESG investment trend by expanding their offering of sustainable products and by providing investors with trustworthy and comparable information – also in response to EU regulation introduced to fight greenwashing and enhance transparency. To fulfil these objectives, investors need solid and reliable data. Given the lack of publicly available information, asset managers are heavily reliant on the information from third-party providers of ESG data, research and ratings, which comes with high costs and many questions.”
Talking to RI, Benoît de Juvigny, Secretary General of the AMF French regulator, said: “We’re not doing this for the sake of it: this is a concrete proposition paper that we hope to see discussed at high level. We hope the European Commission will take on board all or part of our ideas.”
De Juvigny says he believes the Commission is looking for guidance on the subject from regulators. Asked why he thought now was the time for country securities regulators to get involved on ESG data, he said: “We are seeing surging demand as a result of the asset manager requirements under SFDR (Sustainable Finance Disclosure Regulation) coming into force next March, and the rapid evolution of transparency regulations: investment professionals now depend more and more on data providers and the EU green agenda is developing quickly and we are going to see lots of change in 2021.”
He says the discrepancy of data among ESG data providers – shown, he says, by various academic studies and outlined in a report underpinning the AMF/AFM position paper – alongside the increasing market size, concentration and the importance of the players involved, warrants serious regulatory consideration of the potential for conflicts of interest: “In recent months we witnessed huge deals in this area including the buy-out of ISS by Deutsche Borse and the purchase of IHS Markit by S&P. There is now an ESG presence across four market operations areas: stock exchanges, credit ratings agencies, financial data and index providers: you could say this is a good thing, but there is also significant potential for conflicts of interests.”
Asked to name one, he says: “If you create ESG ratings on a company but then sell that company advisory services, there could be a conflict.”
He also notes that many of the ESG players are now based out of the UK or the US, meaning that European regulators need to ensure that conflict-of-interest issues don’t disappear into groups outside of their jurisdiction.
RI questions whether regulation of ESG data providers is plausible in a world where company ESG data is still voluntary? De Juvigny says: “It’s true for the time being that detailed corporate ESG info is not mandatory, but the direction of travel is that the Non Financial Reporting Directive (NFRD) will be revised and become more precise. We don’t think there is going to be perfect comparable corporate data internationally. But there needs to be improvement, and we hope our proposition can be a part of that.”
The AMF/AFM paper makes clear that it sees the regulation of ESG data as being comparable to that of credit ratings. De Juvigny says there are similarities: “Ten years ago the transparency of methodology and conflict of interests of credit ratings agencies had serious question marks. We think there are similar question marks with ESG data now.”
RI puts it that ESG analysis could be closer to equity research, which has far less regulatory oversight of the ‘opinions’ given. De Juvigny concurs, but says: “What we need is that investors can clearly understand the discrepancies among ESG data.”
ESG data providers had mixed feelings on the AMF/AFM report when asked by RI.
Andy Pettit, Morningstar’s Director of Policy Research, EMEA, said: “We support calls for more transparency with respect to what ESG ratings providers measure and how providers evaluate companies. However, we strongly oppose any attempts to regulate how that information is used by ratings providers or their clients. Creating a one-size-fits all scenario runs counter to ensuring vibrant and innovative markets. While underpinned by consistent and regulated financial disclosures (IFRS, GAAP, etc.) investment analysts have different buy/sell/hold views on stocks, and credit ratings agencies may have different takes on the credit worthiness of a company. Similarly, investors demand multiple, diverse viewpoints and perspectives on ESG to help them make informed decisions.”
Anne-Catherine Husson-Traore, CEO at Novethic, the French media/research group, pointed up the corporate data oversight: “The proposals ignore the most important prerequisite for high quality data: more comprehensive disclosure of raw corporate information. Instead of imposing stricter regulation on providers, regulators should focus on encouraging standardised and audited sustainability reporting from companies, particularly in asset classes like infrastructure, where there is little to no information available.”
Marija Kramer, Head of ISS ESG, the responsible investment arm of proxy voting adviser Institutional ShareholderServices, said: “Investors implementing ESG criteria into their investment process must be able to fully compare different data, analytics, and research providers’ methodologies.”
She added: “We are supportive of creating an industry standard or code of conduct. We understand that with a rapidly developing market, stricter guidelines may be necessary to ensure a level playing field as well as to combat the dangers of greenwashing. We welcome the fact that the proposed rules aim to be uniform for all participants in the ESG data space, regardless of size, products, and geographical origin. We welcome the fact that the proposed regulation is not aiming to interfere with the different methodologies.”
Alexandra Mihailescu Cichon, Executive Vice President at RepRisk, told RI: “Yes, there is a need for increased transparency and comparability in ESG data and rating services. Standardization is necessary – and is part of the natural progression for ESG as it moves from infancy into maturity – and standardization by way of regulation is part of this natural progression. But while this announcement and other recent consolidation and standardization developments are focused on disclosures and reporting, we would like to emphasize that it is important to look beyond that to how we can improve implementing ESG activities and processes, for example via a due diligence process on human rights to further drive the sustainability agenda.”
With reporting by Khalid Azizzudin