BETTER FINANCE’s answer to the European Commission (EC) consultation on environmental, social, and governance (ESG) ratings and sustainability factors in credit ratings aims to inform on concerns about the functioning of the ESG ranking market developed by commercial data providers. This agenda pertains to the renewed sustainable finance strategy adopted in July 2021 by the EC, with the objective to deliver “transparent ESG ratings, double materiality in reporting, and a complete Taxonomy”. Among other, sustainability opens an unchartered path of non-financial reporting by issuers and financial product manufacturers. At the same time, a new branch of financial market data has evolved, that of ESG or sustainability ratings, evaluating the compliance or impact instruments have with the said goals. This information is pivotal for the vast majority of individual, non-professional (“retail”) investors and it is decisive for the investment decision-making process of a smaller, but important, segment of this non-professional savers. Thus, the transparency and reliability of ESG ratings is key both for the evaluating the risk and discovering the price of financial instruments, as well as for the investment decision of “retail” investors.
This consultation, divided in two parts, addresses first the functioning of the ESG ratings market, its potential shortcomings, and the need for EU intervention. Second, it aims to inform the Commission on possible shortcomings in relation to the consideration of sustainability factors in credit ratings; on disclosures made by Credit Rating Agencies; and on the need for EU intervention.
BETTER FINANCE notably expresses its views on the divergent methodologies of ESG ratings, the need to authorise ESG rating providers and the need to standardise ESG models.