The European Commission is proposing new regulation for ESG ratings and data providers, a move which have been welcomed by the fund management industry.
These regulations are designed to address a lack of transparency when it comes to the various providers in this market, the data sources they use and methodologies applied. This has created uncertainty and difficulties for asset management groups when it comes to assessing the sustainability of their portfolios.
The European Fund and Asset Management Association (EFAMA) has welcomed these proposals, saying prompt improvements are necessary to provide legal certainty for both managers and investors, and ensure reliable ESG data and ratings are being used.
The regulations have three key components:
- Transparency in data sources, quality, and methodologies: EFAMA says it recognised the diverse approaches used by ESG data providers and ESG rating providers but calls for transparency regarding the origin of data, methodologies used, and estimates provided. Greater transparency should enhance comparability, allowing asset managers to align data with their own ESG views, and improve the reliability of ESG assessments.
- Managing potential conflicts of interest and ensuring robust data governance: EFAMA says that to preserve market integrity, the regulatory framework should include requirements for internal controls and governance processes. This will help minimise potential conflicts of interest, especially with ESG index providers, and ensure the reliability and accuracy of ESG data and ratings.
- International alignment: EFAMA says there is a need for international alignment to create a level playing field for EU providers and streamline regulations and standards. Divergent rules and requirements across jurisdictions would increase complexity and hinder the effectiveness of ESG ratings. EFAMA supports following the recommendations of the International Organisation of Securities Commissions (IOSCO) in its recent report calling for better oversight of these ratings agencies and data providers.
This new regulation comes as demand from investors for ESG-focused investment products and solutions has grown exponentially in recent years. There has been a raft of new EU regulation on this issues including the Sustainable Finance Disclosure Regulation (SFDR), Corporate Sustainability Reporting Directive (CSRD), EU Taxonomy Regulation, and Shareholders Rights Directive (SRD II) — all of which reinforce the need for asset managers to incorporate ESG considerations into their investment processes.
EFAMA regulatory policy adviser Chiara Chiodo says: “EFAMA believes that a comprehensive regulatory framework covering both ESG data providers and ESG rating providers is essential to ensure reliable and transparent ESG information. By addressing the challenges in the ESG data ecosystem, asset managers and investors will have access to robust information for informed decision-making and compliance with regulatory requirements.”
