ESG Ratings providers – ESMA publishes a call for evidence

On 3 February 2022, ESMA published a Call for Evidence, ‘On Market Characteristics for ESG Rating Providers in the EU’ (the Call for Evidence).

What is the Call for Evidence about? And who is it aimed at?

The Call for Evidence aims to establish a picture of the size, structure, resourcing, revenues and product offerings of the different ESG rating providers which operate in the EU. ESMA also hopes to complement this picture with views and experiences from both (a) users of and (b) entities covered by ESG rating providers.

It is addressed primarily to

• ESG Rating Providers, whether established in or outside the EU
• Users of ESG Rating Providers, such as
  • Financial market participants (credit institutions, investment firms, asset managers, insurance undertakings, reinsurance undertakings) that are either already using or considering the use of ESG ratings
  • Individual users acting in a professional capacity such as financial advisors and analysts.
• Entities subject to the assessments of ESG Rating Providers such as
  • publicly listed entities or private unlisted entities covered, in either case, by ESG ratings provided on a professional basis by entities located inside or outside the EU

Each of the above categories is invited to complete a different Questionnaire within the Call for Evidence.

What’s meant by ‘ESG ratings’?

For the purposes of the Call for Evidence, ESMA defines the term ‘ESG ratings’ in the following terms:

the broad spectrum of ratings products that are marketed as providing an opinion regarding an entity, a financial instrument or a product, a company’s ESG profile or characteristics or exposure to ESG, climatic or environmental risks or impact on society and the environment that are issued using a defined ranking system of rating categories, whether or not these are explicitly labelled as “ESG ratings”

Why has ESMA published the Call for Evidence?

In January 2021, ESMA's letter to the European Commission highlighted its view that the unregulated nature of ESG ratings and data assessments posed a potential risk to investor protection.

When publishing its Strategy for financing the transition to a sustainable economy and Annex on 6 July 2021, the Commission announced that it would take action to improve the reliability, comparability and transparency of ESG ratings and committed to launching a public consultation to gather information on the issue. The outcome of the consultation is likely to be the development of an impact assessment on the costs and options of a possible EU intervention.

In November 2021, the Commission requested ESMA’s support in this work.

It noted that

• ESG ratings are used by a wide variety of investors to take into account risks and opportunities linked to ESG issues;
• such products are having an increasingly important impact on how capital markets operate and on how much confidence investors have in sustainable finance products; and
• ESMA should conduct a call for evidence with a view to identifying which ESG rating providers are currently either (a) present in the EU or (b) outside the EU but operating in it.

What happens next?

The Call for Evidence closes on 11 March 2022.

Based on responses received, before the end of Q2 2022, ESMA expects to provide the Commission with an overview of the market for ESG rating providers present or operating in the EU.

It is likely that the Commission will then publish its own consultation seeking views on the use of ESG ratings by market participants and the functioning and dynamics of the market, potential issues. The consultation is also likely to help assess the potential costs an intervention at EU level would entail.