The market for ESG ratings is “fertile ground for potential conflicts of interest” according to financial regulator and watchdog the European Securities and Markets Authority (ESMA).
In its biannual market risk commentary, released last week, ESMA said that the coexistence of ESG ratings with other business lines such as credit ratings, benchmark construction, consulting services or asset management, could result in providers being influenced by outside factors like liquidity, when rating companies or instruments such as green bonds or sustainability-linked loans.
“Even though ESG rating service provision is typically carried out in separate legal entities, commercial interests or regulatory requirements concerning other business activities may lead to conflicting priorities. The risk of ratings inflation from such potential conflicts of interest may contribute to a lack of comparability and trust,” ESMA said.
In addition, the regulator wa…