Impact of ESG factors on credit ratings hard to understand, EU told

Most users of credit ratings do not believe that current EU disclosure guidelines and market trends are sufficient to enable market understanding on how ESG factors influence credit ratings, a recent EU consultation suggests.

Some 72 percent of respondents provided this feedback in answer to questions from the European Commission on how well sustainability risks were being considered in the context of credit ratings and the quality of disclosures made by credit ratings agencies (CRAs).

A small majority of those in this camp (56 percent) would support the EU pursuing non-legislative initiatives to remedy the situation, such as issuing additional guidelines and supervisory actions through securities regulator ESMA. Many of the remaining respondents did not back a specific policy measure.

In 2020, ESMA published disclosure guidelines which required CRAs to identify whether ESG factors have been key drivers behind a credit rating revision, including details on the relevant factors, materiality and methodology. A subsequent assessment by ESMA found that the improvement of transparency had been “partial and not uniform”, based on a comparison of press releases before and after the guidelines entered into force.

Around 66 percent of respondents to the Commission consultation said that the level of disclosures as to which credit ratings actions have been influenced by sustainability factors “has improved sufficiently” – although nearly all respondents (93 percent) said that disclosure quality varied across individual CRAs.

All of the seven CRAs that responded to the consultation said they explicitly incorporate ESG factors into their methodologies and have disclosed details of the methodology that underpins this process.

France-based EthiFinance was the only CRA to back ESMA to issue additional guidelines on disclosure. The majority of CRAs said that EU intervention would risk “too much prominence given to ESG factors as compared with other factors relevant for the assessment of creditworthiness”, according to consultation documents from the European Commission.

The consultation was launched by the EU in April and is one of a two-part survey, which also requested feedback on proposed measures aimed at addressing dysfunction in the ESG ratings market. The results will feed into any upcoming regulatory initiatives on the topic, although no information has been provided on when this is due to take place.