ESG ratings providers face new EU regulations

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: 

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.”

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