The Autorité des marchés financiers (AMF) and its Dutch counterpart, the Autoriteit Financiële Markten (AFM), have joined forces to issue a joint position paper calling for a European regulatory framework of ESG data, ratings, and related services for providers of sustainability-related services.
The proposed framework is aimed at preventing misallocation of investments, greenwashing, and ensuring investor protection. It includes requirements on transparency on methodologies, management of conflicts of interest, internal control processes, and enhanced dialogue with companies subject to sustainability ratings.
Interest in ESG and sustainability has been growing among the buyside community, but it has accelerated during the pandemic as these securities have outperformed their more mainstream counterparts. However, one of the biggest challenges to integrating ESG related material into research is the lack of uniform and standard data sets as well as diverse methodologies.
In addition, although their influence is expected to grow considerably, providers of sustainability-related services remain largely unregulated.
As a result, the regulators want to see greater transparency on methodological choices and on the origin of data. They believe that the increased transparency would allow users to ensure that they share a common understanding of ESG performance and allow for better comparability between providers.
In recent years, Europe has seen consolidation in the market for sustainability-related services which could lead to higher risks due to a limited number of providers, higher prices and the emergence of new potential conflicts of interest.
They believe the framework is a starting point but that should be periodically assessed but the aim is to have organisational and operational requirements to ensure robust processes for data collection and processing.
“We believe providers of sustainability-related services play a crucial role for investors in the market for sustainable finance,”said Laura van Geest, Chair of the Dutch Authority Financial Markets (AFM). “Many investors depend on them in their investment decisions. Introducing minimum transparency and organisational requirements should greatly benefit this key part of the sustainable finance ecosystem.
She added, “This joint AMF/AFM position paper aims at contributing to the debate on what regulation of ESG rating and data services providers should look like. We would like to invite regulators, market players and other stakeholders to add their perspectives to this debate.”
Robert Ophèle, Chair of the Autorité des marches financiers said, “The sustainable investment market is growing rapidly, but its credibility depends largely on the quality and reliability of the ESG information used. It is with this objective in mind and to ensure investor confidence that we wish to propose with the AFM a European regulatory framework for ESG data and service providers. The construction of such a regulation should be put on the agenda of the renewed sustainable finance strategy and conducted collectively.”