European Commission issues proposals to bolster sustainable finance

European policy-makers are proposing a series of measures, including a new oversight regime for ESG rating providers, designed to support sustainable finance and the transition to a net-zero economy.

The European Commission (EC) published proposals that aim to improve transparency in the market for sustainable investments as well as investor confidence.

Among other things, the measures would introduce a new set of criteria for economic activities that contribute to non-climate environmental objectives, such as pollution prevention, protecting water resources and biodiversity, under the EU Taxonomy.

The commission’s package also featured proposals for regulating ESG rating providers that would establish new rules regarding conflicts of interest in ESG ratings and establish oversight for ESG rating services by the European Securities and Markets Authority (ESMA).

“Today, the ESG ratings market currently suffers from a lack of transparency and the commission is proposing a regulation to improve the reliability and transparency of ESG ratings activities,” the EC said in a notice outlining the proposals. It added that ESMA oversight “will also ensure the quality and reliability of their services to protect investors and ensure market integrity.”

Commenting on the initiative, proxy advisory firm Institutional Shareholder Services (ISS) said it is reviewing the proposal in detail.

“ISS supports the commission in not setting minimum requirements on the content of ESG ratings and recognizing that disclosure of information concerning rating models should not reveal sensitive business information or impede innovation,” said Lorraine Kelly, ISS’ global head of investment stewardship solutions, in a release.

“ISS will continue to engage with global policy-makers to highlight the need for harmonization across markets to help drive comparability and consistency across disclosures and to advocate for an ESG data ecosystem that does not hinder providers’ ability to create a competitive service that meets investors’ varied needs,” she said.

“Today, we are taking steps to further develop the EU Taxonomy,” said Mairead McGuinness, commissioner for financial services, financial stability and capital markets union, in a release. “And we are bringing more transparency and integrity to the market by introducing rules on the operations of ESG rating agencies.”

“Enhancing the usability and coherence of the sustainable finance framework will be our key priority,” she said. “We also need to reap the full potential of transition finance to ensure that all companies irrespective of their starting points can have adequate tools and support for their transition efforts towards sustainability.”

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.