The ESG Rating Agencies, or Corporate Sustainability Systems as they have also been labelled as to convey the differing elements of the industry, are becoming ever more important in theory. This is because, as Refinitiv found recently, 98% of global institutional investors are now actively considering ESG in their investment decisions. However, there are massive issues within the industry and its multitude of models, which has now led the Autoriteit Financiële Markten (AFM) and Autorité des marchés financiers (AMF) to issue a joint paper calling for regulation at the European Level. However, what would a new regulatory framework look like, what could it achieve, and what effect would it have on the development of this relatively nascent industry?   Whilst the EU have started a study on the ESG rating marketplace and its intricacies, as of yet the market is essentially unregulated. The market they exist to serve is exploding and growing at an incredible rate but, just like the cr

We have reviewed the credit rating situation in China extensively here in Financial Regulation Matters (see here ) and it is well known that the Chinese rating agencies are under massive pressure, both from the Chinese State and also the opening up of the domestic marketplace to the international credit rating agencies for the first time. However, the underlying political dynamics within the Chinese marketplace means that the credit rating agencies within the country are between a rock and a hard place and, yesterday, one of the Chinese credit rating agencies found themselves being thrown between the two.   The Chinese domestic marketplace is in a precarious position at the moment, as a number of defaults rock the confidence in domestic corporate debt market. Whilst this is a trend across the world of course, there have been a number of high profile defaults recently within a relatively short space of time. What increases the pressure is that a number of ‘State-Owned Enterprises

Today’s post reacts to comments recently from Christine Lagarde, relating specifically to the role and neutrality of the European Central Bank and its position with regards to advancing European policies. We have discussed, on a number of occasions recently, the perilous position of the sustainable rating environment and, as I suggest, the potential importance of European sustainable-related developments to the health of that particular industry. In that regard, the recent comments on the role of the ECB in potentially enforcing the EU’s climate-related policies not only marks a controversial turn in sentiment, but potentially impacts the development of the sustainable rating marketplace.   Lagarde spoke recently and in emphasising her unhappiness with the development of sustainability in the marketplace, declared that ‘ climate risks are not adequately priced ’. The article in Bloomberg’s Quint offering suggests that she may lead the ECB in a new direction, with the decisions on

Here in Financial Regulation Matters , we are more than aware of the pressure that credit rating agencies have been piling on the African continent on account of the pandemic. We looked recently at the dynamic here , and have also reviewed the views of many current and former rating analysts – a representative example of the argument is here – that consists of the understanding that investors in African debt knew the risks, and should subsequently suffer the consequences. However, there is more to the story than that and, even more importantly, that view maintains the status quo and does not seek to advance the position of the countries in question. In that light, the question needs to be ‘what can be done?’, but also ‘should it be done?’   The African Union, via its African Peer Review Mechanism (APRM), has developed a report entitled the ‘ African Sovereign Credit Rating Review ’, which was published recently and is available here . The report, which the APRM’s CEO is the first

Today’s post reacts to an article in the Financial Times from Monday, entitled ‘ Oil and Gas Lobby moves to embrace green investors ’. There are some really concerning elements to the article (what it reports, not how it reports them) and the thought occurred that ESG rating agencies (aka Sustainability Rating Agencies, like Sustainalytics or MSCI) will have a massive role to play in guarding against so-called ‘ greenwashing ’ – where an entity would dress up their operations solely to look good to ESG investors, rather than actually committing to the principles – and, more importantly, whether they have the fortitude, capability, and authority to take on that vital role.   The article focuses on the development of a ‘ ESG Centre ’, a new initiative put together by the Independent Petroleum Association of America . The IPAA has enlisted the help of FTI Consulting, who as a business advisory and public relations firm, are now advising the trade body and its members of how to better

The connection between the concept of ESG (Environmental, Social, and Governance) principles and the process of providing ‘ratings’ has been a common theme recently, for a number of reasons. On a number of occasions over the past few months, we looked at issues ranging from disclosure standards to sustainability rating agencies’ methodologies . This week, interestingly, the rating universe – that consisting of the credit rating and sustainability rating organisations – have been targeted, but for different reasons. However, both issues are concerned with the concept of ESG, which itself has been the centre of debate for a number of years. As the geopolitical landscape moves in different directions regarding the concept of sustainable finance , the rating universe is seeking to carve out its own place in the arena. However, there are a number of issues being revealed.   The first is one that was advanced by the head of Polymetal, the biggest London-listed producer of Gold. Vitaly

In May of this year, Morningstar settled with the SEC for $3.5 million for violating regulations designed to protect against internal conflicts of interest . On Tuesday, the SEC announced that Kroll Bond Rating Agency (KBRA) had agreed to pay more than $2 million to settle charges relating to the ratings of commercial mortgage-backed securities (CMBS) and collateralised loan obligation combination notes (CLO Combo Notes) . In this short post, we will discuss the reality that transgressive behaviour is being witnessed across the industry, not just in the Big Three, and why that may be.   The settlement has been reported widely in the business press ( here and here for good examples). In relation to the actual charges that were put forward by the SEC, it argued that Kroll had permitted its analysts to make adjustments which went on to have material effects to the final rating, although those adjustments were not made on any analytical basis. Furthermore, it was alleged that there w

Since January 2019, the European Securities and Markets Authority (ESMA) has been conducting a public consultation on the issue of internal controls within credit rating agencies operating within the jurisdiction. Based on observations between 2017 and 2018 that identified a number of shortcomings in this area of the CRAs practices, ESMA has been working at providing clear guidelines to help the industry move forward. Today, that report was released.   Based on the CRA Regulation (CRAR) , ESMA are required to ensure that regulations are developed and implemented relating to the internal control systems of the CRAs, which they must have in place ‘ in order to prevent or mitigate any possible conflicts of interest and ensure the integrity of its credit rating activities ’. As we know, this is a common, but no less important objective of rating agency regulators, and it is interesting to note that, more than a decade after the Financial Crisis, regulators are still attempting to prov

Efforts to relieve the financial pressure on the world’s poorest countries since the pandemic started have resulted in very little progress. UN, IMF, and World Bank efforts have led to the establishment of the Debt Service Suspension Initiative (DSSI), that consisted of members of the so-called ‘Paris Club’ and other prominent non-members, like China, suspending the rights to collect payments on their investments into poorer countries. However, there are so many issues with this plan, that not only has it not been entirely successful but it has also led to a lack of inspiration in similar efforts but from the private sector – and the involvement of the private sector is crucial. This has led critics to suggest that credit rating agencies have a role to play and, furthermore, should be more engaged in finding a solution. However, is this really the case, or is it yet another example of onlookers not fully understanding the ‘rating dynamic’ as I like to call it, and calling for action an

In today’s short post, news regarding the plans of the International Organisation of Securities Commissions to set global standards in relation to ESG disclosure will be considered, particularly in relation to the trajectory of ESG rating agencies and their inherent issues. Though IOSCO’s recommendations would not be binding, they are influential and, as we shall discuss, the fact that the EU is currently considering its approach in this sector may prove to be perfect timing for some coordination in this field. However, what will it mean for the ESG rating agencies who are coming under fire recently for a lack of timely and comparable analysis?   The Financial Times reported yesterday that the IOSCO is planning on taking action with regards to the disparate set of rules regarding ESG disclosure across the spectrum . Research has suggested that there are more than 10 standards that suggest frameworks for how ESG-related information should be disclosed . Even via the European Union’

In this post, we will review the story today that a number of leading German financial institutions are taking aim at the Big Three credit rating agencies, specifically in relation to the fees they charge for their credit rating-related data feeds. This issue of transparency, particularly with regards to the provision of ancillary services, their cost, and the impact that it has upon the rating dynamic moreover, is not a new phenomenon. In fact, this was the very subject of my 2018 book Regulation and the Credit Rating Agencies; Restraining Ancillary Services which you can preview here , and purchase here .   In news published by Reuters today, it was stated that the Fund Association BVI, and the Insurance industry body GDV are in the process of making a joint appeal to the European Commission regarding the lack of transparency over the pricing structures from the ancillary service-wings of the credit rating agencies. The BVI today declared that the rating agencies are exploiting

We have analysed the issue of domestic credit rating provision within China on a number of occasions here in Financial Regulation Matters . Today one of my articles was published in The Journal of Business Law (available here , and here in a pre-published version) that analyses the trajectory of rating provision within the country. We have also looked at the situation from the view of the political and geo-political ambitions of China here , and from the viewpoint of the leading US-based rating agencies here . In today’s post, we will look at evidence that demonstrates the problem at hand, and why China has now become so open to having the US-based rating agencies operating within its territory, on their own, for the first time.   It has been reported this morning that domestic Chinese rating agencies are providing for massive upgrades in their ratings for ‘local government financing vehicles’ (LGFV), despite the impacts of the Covid-10 pandemic still playing out. The article in