The EU on June 12, has gone on to propose novel regulations for the firms that happen to be selling environmental, social, and governance ratings, thereby forcing some to go ahead and restructure their businesses in an industry’s major shake-up.
It is well to be noted that Moody’s, S&P Global, and Morningstar happen to be the biggest sellers in terms of ratings on companies’ performance as far as ESG goes, which in turn helps guide investment worth trillions of dollars.
As per the EU’s draught legislation, providers shouldn’t be offering consulting services to investors, the sale of credit ratings, or benchmark development, among other things, so as to avoid potential conflicts of interest.
It is well to be noted that the providers will need to be authorised as well as supervised by the European Securities and Markets Authority, and breaching the new rules could very well land them with a fine of almost 10% of their annual net turnover.
These rules could go on to force the agencies to make their businesses distinct, although it wasn’t clear what changes the companies would have to make so as to be regarded as functioning independently.
As per European Commissioner for Financial Services, Mairead McGuinness, ESG rating agencies that happen to score companies on the basis of governance elements are absolutely unregulated, and hence it is very complex to compare ratings laid down by various agencies. She added that they would like them to be comparable as well as reliable.
As per the critics, ESG rating methodologies are very complex and opaque, and they tend to reward firms that go on to disclose more data rather than those that are best suited to manage the risk of ESG or do the ideal job when it comes to limiting business impacts that are negative.
Apparently, authorities are trying to incentivize more apt investment and also tackle greenwashing by way of boosting transparency and equipping investors with enhanced information. It is well worth noting that Britain this year also laid down plans to regulate the providers of ESG ratings.
According to S&P Global, it believed that a consistent implementation when it comes to recommendations from IOSCO, which happens to be a global securities regulatory body, would go on to support ESG rating products and also aid in fragmentation across jurisdictions.
The London Stock Exchange Group, which gives ratings via Refinitiv unit, remarked that it welcomed the proposed rules by the EU. Notably, Thompson Reuters, which happens to be the parent company of Reuters, owns a stake in LSEG.
The proposal makes way for greater transparency across the market without prescribing the methodologies of ESG assessment, thereby contributing to a more effective capital allocation to activities pertaining to sustainable investment.
Morningstar Sustainalytics remarked that its analysts were indeed reviewing the proposal so as to understand the wider industry implications.
ESG ratings happen to measure a company’s exposure to financially relevant ESG elements such as pollution as well as human rights and how the firm manages exposure when it comes to such risks.
The fact is that the ratings do not gauge a company’s impact as far as the environment and the outside world are concerned, and that the comparably high ranking that’s awarded to fossil fuel as well as mining companies has gone on to get criticism that the end-investors really do not ascertain how they work.
The global sustainable assets under management happened to be at $2.74 trillion in March this year, as per Morningstar estimates. Much of that happens to be in funds that track indexes comprised of companies awarded particular ESG rankings or companies that happen to be ranked low.
According to a German Conservative European parliamentarian, Markus Ferber, who happened to criticise the EU proposal, letting only standalone ESG rating providers operate majorly limits the pool of companies that actually go on to provide such a service in the first place. He added that there is indeed a big risk that the end result will go on to imply fewer ESG ratings across Europe.
Significantly, the European Commission made an announcement of its plans as part of the new measures incorporated so as to encourage more sustainable as well as ethical investment.
These happened to include new criteria when it comes to the so-called taxonomy, which is a system that helps classify which parts of the economy can be marketed as investments that are sustainable.
