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

Comments

Post a Comment

Popular posts from this blog

Lloyds Bank and the PPI Scandal: The Premature ‘Out of the Woods’ Rhetoric

Image
Today’s very short post focuses upon the news that the Financial Conduct Authority (FCA) has recently extended the deadline to claim compensation for mis-sold ‘Payment Protection Insurance’ (PPI). Whilst a lot of financial institutions will have to prepare to offset the extended deadline, it is Lloyds that has grabbed the business headlines by apportioning an extra £350 million to offset any further claims that may be made of it – however, this comes only a week or two after the Bank posted its best performance figures in over a decade, as was previously discussed in Financial Regulation Matters . This post will therefore argue that the rhetoric being advanced recently regarding Lloyds – rhetoric like Lloyds represents ‘ a modern day success story ’ is wide of the mark and creates a false sense of security that we simply cannot afford to believe in. The ‘ robust recovery ’ was heralded far and wide upon the publication of Lloyds Bank’s financial performance for the previous fi
Read more

The Analytical Credit Rating Agency: A New Entrant That Will Further Enhance Russia’s Isolation

Image
This short post is based upon a forthcoming article by this author that examines the viability of the latest entrant into the credit rating arena, the Analytical Credit Rating Agency (ACRA). The article, which is due to be published in the European Company Law Journal (and is available here in a pre-published version), looks at the chances of the ACRA succeeding when viewed within the parameters of perception , an aspect that underpins the credit rating sector. For this post, the focus will be upon introducing the ACRA, and then on examining the effect it may have upon the wider political issues affecting the Russian Federation. The Analytical Credit Rating Agency was established in November 2015 and comprises of 27 major Russian companies and financial institutions that serve as its shareholders. The agency, which became the first rating agency to receive accreditation from the Russian Central Bank under the new N 222-FZ Law which was designed to protect investors, has a re
Read more

The Case of Purdue Pharma, the Sackler Family, and the Opioid Crisis

Image
In the first of two short posts today, we will look at the case of the billionaire Sackler Family and their remarkable effect upon American society. The family, who own Purdue Pharma amongst a list of other ventures, have this week seen a massive legal action taken against them by the State of New York who argue that the company is ‘ responsible for the opioid epidemic ’ sweeping through the United States. The attorney-general for New York has called the lawsuit the ‘ nation’s most extensive ’ with respect to the pharmaceutical industry and comes right on the heels of a $270 million suit that was settled in the State of Oklahoma on exactly the same grounds. Whilst the company and the billionaire family who own it did not admit guilt (settling parties rarely do, hence why they settle outside of court) it has potentially opened the trapdoors for litigation. It comes as no surprise then that the company is reportedly considering bankruptcy proceedings in the face of such an onsl
Read more