EU markets regulator the European Securities and Markets Authority (ESMA) took its first step today towards regulating the market for ESG ratings, issuing a ‘Call for Evidence’ to gather information on the size and makeup of the rapidly growing sector.
Demand for ESG data, service and ratings has surged as investors increasingly integrate ESG considerations into the investment process, yet the activities and businesses of the providers are generally not covered by markets and securities regulators.
Calls to bring the sector under regulatory oversight have gained momentum over the past several months. Early last years, ESMA issued a letter to the European Commission’s financial services coordinator Mairead McGuinness, advising that the current unregulated status of the ESG ratings sector and the resulting lack of transparency posed a potential risk to investors. In July 2021, the Commission launched a new Sustainable Finance Strategy, which included a pledge to take action to improve the reliability, comparability and transparency of ESG ratings, and subsequently asked ESMA to begin examining the market participants. In November, securities regulator standards setter IOSCO urged regulators to focus on improving transparency in the ESG ratings and data space, and to begin to apply regulatory oversight.
According to ESMA’s call for evidence issued today, the new exercise is aimed at providing the regulator with “a picture of the size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU,” along with feedback from users of ESG ratings and from companies covered by the ratings. Topics covered in the consultation include market participants’ views into the relevance of ESG ratings to the financial markets, the level of risk the ratings provide to financial stability and investor protection, and satisfaction with transparency into the methodologies and data sourcing used for the ratings.
The call for evidence is open for responses until March 11, and ESMA aims to deliver the information to the Commission in Q2 2022.
Click here to access the call for evidence.