The European Commission has taken a significant stride with its newly unveiled proposal on Environmental, Social, and Governance (ESG) rating activities, which aims to provide a more comprehensive understanding of ESG ratings methodologies, data sources, and potential biases, ultimately empowering investors to make informed decisions.
Their proposal that fees charged for ESG ratings services are independent of the level of rating, or any other work-related outcome, will lead to non-discriminatory treatment of ratings purchasers. We propose that the Commission could go further to increase transparency for all ratings users by introducing a more specific fee grid and extending these fairness principles to other contractual provisions and not just fees.
EFAMA also commends the Commission for excluding ratings produced internally by regulated financial market participants for their own use, as these are not being provided on a commercial basis.
There are two areas of the proposal that we would encourage the Commission to reconsider:
#1 Bring both ESG data and ratings providers within the legislative framework
Since ESG data and ESG ratings are complementary, it is crucial to address both aspects simultaneously and not only the data embedded in ESG ratings. Enhancing the quality and transparency of ESG data and ratings together would ensure that investors and regulators have access to reliable information, promoting informed decision-making and fostering trust in the ESG ecosystem.
#2 Strengthen transparency by aligning with IOSCO recommendations
The proposal could be further strengthened and aligned with international standards by improving transparency on data sources, the ESG KPIs used, measurement methodologies, and the scope of business activities assessed.
Chiara Chiodo, Regulatory Policy Advisor at EFAMA stated; “In the ESG rating world, transparency is the key that unlocks trust, accountability, and as a result, sustainable growth. We congratulate the Commission for the many improvements that the proposal will bring. However, we still believe that there is room to foster even more clarity and transparency for financial market participants, as well as end investors.”
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