Given the increasingly important role ESG ratings and data products providers play in investment processes, EFAMA welcomes the increased attention of regulators to this issue. In light of the growing regulatory scrutiny on the ESG characteristics of potential investments, improving the usability and reliability of the ESG ratings and data products is a key priority for the European asset management industry.
EFAMA therefore supports IOSCO’s recommendations that national regulation investigates this market more closely to address the lack of transparency of ESG providers’ methodologies and pricing policies, data governance and data quality, and the management of potential conflicts of interest.
EFAMA recommends that regulators and ESG ratings and data products providers focus their attention on:
1. Improving the transparency around ESG ratings methodology and ESG data products – The usability of ESG ratings and data products by asset managers remains greatly limited by the lack of transparency in the types of data and methodologies on which providers base their products. EFAMA encourages providers to develop common industry standards and codes of conduct to enhance their disclosures on data collection and an ESG ratings/scorings methodology. While allowing for enough flexibility for providers to use a wide range of methods and approaches, third-party providers should offer full disclosure of the methodologies used and their data sources. This would improve the comparability of the providers’ ESG data products and allow asset managers to understand how they compare across companies and sectors.
2. Ensuring robust and transparent governance processes to avoid potential conflicts of interest - To preserve market integrity, EFAMA encourages ESG ratings and data products providers to develop and adopt best practices codes on identifying, managing, and disclosing conflicts of interest. More specifically, EFAMA believes such a code of conduct is necessary when a provider performs consulting services for companies subject to its ESG ratings and products services.
3. Addressing the pricing and licence power of ESG ratings and data products providers – The increasingly high market concentration of ESG data, coupled with the growing need for ESG data from asset managers, has given providers the ability to charge considerably high fees. This spike in the ESG data products cost is particularly detrimental to smaller firms and ultimately affects end-investors. We therefore urge regulators to consider the pricing policies applied by data providers and to take actions to enhance fee transparency and fee justification.
4. Alleviating the data gap by introducing global ESG company reporting standards and establishing the proposed European Single Access Point for ESG data – EFAMA urges regulators to improve the availability of ESG data and the consistency in non-financial company reporting. We believe the CSRD review will help to close the data gap and result in more meaningful, comparable and reliable ESG disclosures on investee companies. We also encourage regulators to implement the proposed European Single Access Point, leveraging on digitalisation, to help overcome the current dependency of data users on commercial data providers.