Providers of ESG data, ratings and related services need to be subject to a regulatory framework, according to a statement by France’s financial market regulator, The Autorité des marchés financiers (AMF).
The call for regulation by the AMF comes in response to an ongoing public consultation by the European Commission into the functioning of the ESG ratings market, and into the consideration of ESG factors in credit ratings. The consultation, open until June 8, aims to inform the Commission’s initiative to “foster the reliability, trust and comparability of ESG ratings by early 2023.”
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 year, EU markets regulator the European Securities and Markets Authority (ESMA) issued a letter to the European Commission, 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. ESMA currently has a complementary consultation into the sector underway.
In the AMF’s response to the Commission’s consultation, the regulator set out several recommendations for initiatives targeting the sector. These include proposing that future regulation go beyond covering only ESG ratings, but instead encompass the entire range of ESG data, ratings and services, that regulations include transparency into methodologies and data sources, and that supervision be centralised at the European level under ESMA. The AMF also called for ESG data and services providers to be registered with ESMA.