Small provider regime proves key sticking point for ESG ratings regulation

Technical trilogue document notes tentative agreement on small provider exemptions, but multiple providers proposal still faces opposition.

Proposed requirements around the use of smaller providers of ESG ratings remain the main negotiation hurdle as the EU’s political institutions try to hammer out an agreement on regulation for the industry.

According to a document seen by Responsible Investor outlining the draft results of a technical trilogue meeting which took place 18 January, negotiators decided that a European Parliament proposal on requiring buyers of ratings to consider a smaller firm when buying from multiple providers should be subject to a political negotiation.

Technical trilogues tend to involve fewer senior officials and are intended to iron out the finer details of regulation, whereas political trilogues aim to find agreement on larger issues.

Under the Parliament proposal, an investor or other entity looking to buy ratings from at least two providers would have to consider appointing a provider with less than 15 percent market share in the EU.

However, both the Council of the EU and the European Commission opposed this in discussions.

The Council warned that wording requiring buyers to consider a smaller provider for their second choice could lead to them choosing only one provider. It added that a similar requirement in the credit ratings regulation had not worked and that the provision may not work in the current ESG ratings market.

The notes on the trilogue document are less detailed on the Commission’s opposition, simply noting that it did not see a strong justification for the proposal. However, the notes indicated that the Commission could agree to wording that buyers “may consider” instead of “must consider” hiring a smaller agency.

In the end, the proposal was returned for political negotiation, along with some sections dealing with the regimes for third-country providers and in-house ratings.

However, there was a “tentative compromise” agreement on the Council’s proposal to exempt smaller providers from most of the regulation. The Parliament negotiators agreed in exchange for regulator ESMA being given more enforcement powers against firms which are exempt.

The EU is keen to avoid strangling competition and new entrants to the market through an overly burdensome regulation, especially as there are concerns about US and UK dominance of the ratings market.

The European Association of Sustainability Rating Agencies – an industry body of seven small and medium-sized ratings providers – has also raised concerns. At the start of January, it warned that the current public proposals could have a “potential disproportionate impact on the competitive standing of emerging players”.

A spokesperson for the Belgian presidency of the Council said it does not comment on leaks. The Commission declined to comment. Parliament rapporteur Aurore Lalucq did not respond to requests for comment.