ESMA launches consultation on ESG ratings

Amid concerns about a lack of standards and oversight for ESG ratings, the European Securities and Markets Authority (ESMA) launched a consultation on the sector.

Last year, ESMA warned that the “unregulated nature” of ESG ratings and data represented a potential risk to investor protection, particularly given the growing importance of those ratings to investors.

Among other things, policy-makers have raised concerns about a lack of transparency in the ESG rating industry, the lack of comparability between ratings, and potential conflicts of interest.

On Thursday, the region’s securities regulator issued a paper that seeks feedback on the ESG rating industry to give policy-makers insight on the size, structure, revenues and product offerings that have been developed in the sector.

That feedback will inform efforts to develop potential regulatory policy to address the investor protection concerns.

ESMA has called for the development of regulatory requirements to ensure the “quality and reliability” of ESG ratings, and the data that underpin those ratings, to help mitigate the risks.

“Without regulatory safeguards for these products, several issues and risks reduce the potential benefits of [ESG] ratings,” ESMA said in its paper.

The regulators noted that a future consultation from the European Commission (EC) will seek feedback on the use of ESG ratings by market participants and “the functioning and dynamics” of that market.

The deadline for feedback on ESMA’s consultation is March 11. It intends to report its results to the EC by the end of the second quarter.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.