The European Regulation of ESG Rating Agencies Takes Its Next Step


The issue of regulating the so-called ESG Rating Agencies has been reviewed here in the CRRI blog a few times recently – here and here. One thing that is for sure is that the issue of needing to regulate the agencies and their growing influence is now firmly on the global agenda. In the EU, which for quite a while has been calling for regulation in this niche space, there is a document due out any moment which should formally start that regulatory process within the bloc. In this short post, we will take a look at the Strategy for Financing the Transition to a Sustainable Economy.

 

Different media outlets are reporting different things with regards to the new Strategy document being compiled within the EU, which should be unveiled this week. Bloomberg cites the aim as being to prevent greenwashing, and says that the Strategy will ‘propose tightening reporting requirements for financial entities and incorporating climate-related risks into credit ratings and bank capital requirements’. Meanwhile, in Proximo, the report focused entirely on the impact the Strategy will have on the ESG Rating Agencies: ‘Given there are just three major credit rating agencies… all of which have easily comparable methodologies, the EC proposal to make ESG ratings more reliable and comparable is welcome’. Apparently, the Strategy will invite ESMA to conduct studies as to how ESG factors are incorporated into credit rating analyses (according to Bloomberg), but it is questionable how effective this would be if this were true; we know how they are incorporated – majoritively based on the agencies’ understanding of materiality, nothing more. It is very unlikely that ESMA will dictate to rating agencies how to incorporate ESG into their methodologies. However, for the ESG Rating Agencies, there does need to be standards set. Arguably, the same issue applies to the ESG Rating Agencies in that no regulator will dictate to a private creditworthiness or ‘ESGworthiness’ provider how to incorporate the oft-subjective concept, but the need for standard setting with regards to methodological announcements, terminologies, and structure (perhaps) is more than needed. The research-confirmed divergence in the sector will lead to serious problems if it persists.

 

We await to see what the Strategy actually says, and here in the CRRI blog we will cover it when it launches. However, one sincerely hopes that we do not just see another example of regulatory misalignment that leads to very little impact in the crucial fields of credit and ESG ratings.

 

Keywords – ESG Rating Agencies, Credit Rating Agencies, EU, ESMA, @C_R_R_I

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