ESG Ratings providers – ESMA publishes letter to Commission

On 12 November 2021, ESMA published a letter it had sent to the European Commission (the Commission) reporting back on the findings of its Call for Evidence (CfE) on market characteristics for ESG rating providers in the EU.

The CfE ran from 12 November 2021 to 11 March 2022.

What’s the background?

ESMA set out its initial findings in a letter to the Commission at the end of January 2022 and the final feedback echoes the concerns raised then.

Overview of findings

Responses to the CfE indicate a number of key characteristics and trends:

• The structure of the market among providers is split between a small number of very large non-EU entities, and a large number of significantly smaller EU entities (mostly small and medium sized enterprises). While the legal entities of respondents were spread out across almost half of the EU Member States, a large number of these were clustered in only three Member States. The predominant business model is investor-pays, however, provision on an issuer-pays basis is more prevalent than anticipated (around a third of responses from providers).

• The most users of ESG ratings are typically contracting for these products from several providers simultaneously, selecting more than one provider to increase coverage, either by asset class or geographically, or in order to receive different types of ESG assessments. A majority of users contract with a small number of the same rating providers, indicating a degree of concentration in the market.

  The most common shortcomings identified by the users were:

  • a lack of coverage of a specific industry or a type of entity;
  • insufficient granularity of data; and
  • complexity and lack of transparency around methodologies.

• Entities covered by these products must dedicate at least some level of resourcing to their interactions with ESG rating providers, although the amount is largely dependent on the size of the rated entity itself. Most entities highlighted some degree of shortcoming in their interactions with the rating providers, particularly on the level of transparency as to the basis for the rating, the timing of feedback or the correction of errors.

Conclusion

The letter concludes that feedback received on the market for ESG rating and data providers is indicative of an immature but growing market, which, following a number of years of consolidation, has seen the emergence of a small number of large non-EU headquartered providers.

It found that this market structure bears some resemblance to that which currently exists for credit ratings. Similar to that market, there are a large number of smaller more specialised EU entities co-existing with larger non-EU entities who provide a more comprehensive suite of services.