French and Dutch financial market authorities (Authorite des Marches Financiers and Autoriteit Financiele Markten) propose a European regulatory framework for providers of sustainability-related services (SSP’s) that provide ESG ratings, methodologies and measurements. The purpose is to prevent misallocation of investments, greenwashing and to protect investors.
As the demand for ESG and sustainable products increase, investors and asset managers will need more reliable ESG data to support the shift towards greener economies.
The joint paper addresses:
- Transparency on methodologies;
- Management of conflicts of interest;
- Internal control processes;
- Enhanced dialogue with companies subject to sustainability ratings.
Oversight over Sustainability Service Providers
In order to ensure that investors are being offered ESG products accurately, the data upon which an assessment of the underlying investments is determined as being in compliance with the ESG parameters becomes critical to avoid incorrect classification of investments as being sustainable and ESG aligned. This emphasises the importance of ensuring data that will underpin the sector is reliable, and therefore sustainability service providers (SSPs) may also fall under supervision, as well as having visibility of the methodologies adopted by the SSP.
ESG Ratings lack uniformity & Greenwashing
The observations noted that ESG ratings lack uniformity presenting challenges in coordination of standards that will be critical in underpinning the allocation of investments. The lack of uniform data or methodology could lead to increased ‘greenwashing’ through incorrect classification and allocation of investments as having the ESG or sustainability features which may result in investment which may not meet the relevant criterion.
Recommendation
The Dutch and French financial market authorities in their joint paper made the following recommendations:
- Seek a European wide regulatory framework for ESG data, analysis and services;
- Provide greater transparency on methodologies, management of conflicts of interest;
- Meet requirements on internal controls and governance relating to the reliability and quality of the services provided and management of any conflicts of interest;
- SSPs to European companies are required to operate through an establishment located in the European Union and should be supervised by ESMA;
- That recommendations must be proportionate and encourage, not stifle, innovation.
The authorities recommend a new ad-hoc regulatory framework instead of extending an existing framework, such as the regulation of Credit Rating Agencies.
