The proposed amendments to the EU ESG Ratings Regulation by the ECON of the European Parliament could lead to increased costs for users.
According to ESG Investor, this regulation aims to boost competition among ESG rating providers, mandating entities seeking more than one ESG rating to include at least one provider with less than 15% market share. While this move is expected to enhance competition, it could inadvertently hike the overall costs for asset managers and other customers due to the need to engage multiple data vendors.
Industry experts have voiced their concerns about these potential cost increases. Rob Furdak, Chief Investment Officer for Responsible Investing at Man Group, criticised the proposal as “terrible,” emphasizing the lack of value in being forced to use data from certain providers. Similarly, Brian Cullen, Chief Commercialisation Officer at Morningstar Sustainalytics, expressed worries about the new 15% requirement potentially limiting investors’ choices and hindering innovation in the industry.
A survey by sustainability firm ERM highlighted the rising costs and usage of ESG data. It revealed that investors’ annual expenditure on ESG data and ratings ranged between $175,000 and $360,000. The survey also noted an increase in the integration of ESG ratings into investment processes, from 12% in 2018-19 to 43% in 2022. Furthermore, the frequency of ESG ratings usage has also surged, with 94% of respondents using them monthly in 2022, up from 78% in previous years.
The rapid expansion of sustainable finance regulations has been identified as a primary driver for the high costs associated with ESG data. Maria-Elena Drew, Director of Research, Responsible Investing at T Rowe Price, suggested that standardising disclosure requirements could help address the cost issue. The ECON proposal also includes a request for providers to consider environmental, social, and governance factors separately to improve transparency and integrity of ratings, a move welcomed by experts but noted to potentially increase costs for users.
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