The European Securities and Markets Authority (ESMA) has published a letter to the European Commission around the findings of a call for evidence on ESG ratings.
ESMA received 154 responses and found 59 ESG rating providers that are currently active in the EU. Its analysis of the responses found three major characteristics and trends.
In terms of ESG rating providers, it found that the structure of the market shows there are a small number of very large non-EU providers and a large number of significantly smaller EU entities. It added that while legal entities of respondents are spread out across almost half of the EU Member States, a large number of these are clustered in a small number of Member States.
As for users of ESG ratings, ESMA found that they are typically contracting these products on an investor-pays basis from several providers simultaneously. The reasoning for using multiple providers is to increase coverage, either by asset class or geographically, or to receive a different nature of ESG assessments.
The most common shortcomings identified by the users were a lack of coverage of a specific industry or type of entity, insufficient granularity of data, and a lack of transparency around methodologies used by ESG rating providers.
Finally, in terms of entities covered by ESG ratings, the report found they dedicate at least some level of resourcing to their interactions with ESG rating providers, although the amount largely depends on the size of the rated entity itself.
Furthermore, most respondents indicated some degree of shortcoming in their interactions with the rating providers, most notably on the level of transparency as to the basis of the rating, timing of feedback and correction of errors.
Earlier in the month, ESMA offered guidance to supervisors for sustainability. It offered guidance for the supervision of fund documentation and marketing material, as well as guiding principles on the use of sustainability-related terms in funds’ names.
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