Leading ESG rating providers including MSCI and the London Stock Exchange Group have rejected the European Union’s proposals to regulate the sector.
Responding to an EU consultation, the pair both said there was a need for EU-level intervention but stopped short of saying this should be regulatory, stating that a code of conduct would suffice.
Morningstar, which owns data provider Sustainalytics, said it has “no opinion” on whether EU intervention was necessary but added “principles of good conduct” would be more appropriate than fully-fledged regulation.
S&P Global did not respond to the question about whether it supported regulatory intervention but added many problems stem from the “lack of standardised non-financial disclosure by companies”.
Responding as to why it did not deem regulatory intervention necessary, MSCI said the nascency of the market and the rapid development of services to support the understanding of ESG risks and opportunities means an “industry-supported code of conduct” was more suitable.
This, it said, could be published and run by the International Organisation of Securities Commissions (IOSCO).
Despite the pushback from leading providers, 80% of the market was supportive of some sort of legislative intervention in the ESG rating market.
The European Commission launched the consultation in April, requesting feedback on measures including transparency and methodologies adopted by ESG rating providers.
The regulation of data providers and the need to provide transparent and consistent ESG data has been a hotly contested topic in recent months.
In July, the European Securities and Market Authority (ESMA) said it was seeing “growing momentum” among regulatory bodies to address the issues of ESG rating providers after their shortcomings were again exposed in recent industry feedback.
Overall, the consultation received 168 responses from ESG rating providers and ESG rating users including private companies, central banks, public authorities and non-government organisations from across Europe.
The consultation found 81% use ESG ratings mostly or exclusively from large market players, while 60% agreed the current market conditions make it difficult for smaller market players to enter the market.
Of the main issues to be addressed, 90% agreed the main element to be addressed should be improving transparency on ESG methodology.
This was followed by improving conflicts of interest (80%), improving reliability (73%), clarifying objectives of different types of ratings (70%) and clarifying what is meant by and captured by ratings (68%).
In November last year, IOSCO called for tighter regulation of ESG data providers to stamp out greenwashing and said regulators could consider making providers’ data and information sources publicly disclosed in a bid to increase transparency and address conflicts of interest.
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