The European Securities and Markets Authority (ESMA) is seeking public feedback on proposals to enhance the consideration of environmental, social, and governance (ESG) factors within credit ratings.
The consultation, which opened yesterday (2 April) aims to ensure these ESG considerations are systematically integrated into credit rating methodologies and clearly communicated to investors.
According to the ESMA, the proposals aim to “deliver a more robust and transparent credit rating process through the consistent application of credit rating methodologies.”
ESMA recommends requiring credit rating agencies to document their use of ESG factors and enhance the disclosure of these factors in both credit ratings and outlooks.
The consultation follows a request from the European Commission in June 2023, seeking ESMA’s advice on how to modify existing regulations to ensure consistent consideration of ESG risks in credit ratings, along with greater transparency from agencies on their integration of these factors.
In a related development, ESMA is also involved in efforts to bring transparency to ESG ratings providers. These providers offer external assessments of a company’s sustainability practices for investors. However, concerns have been raised about the lack of standardised methodologies used by different ESG rating companies. This inconsistency can lead to significant variations in ratings for the same company, potentially creating an unfair system.
To address this, the Council and European Parliament reached a provisional agreement in February 2024. This agreement would require ESG ratings providers to be authorised and supervised by ESMA.
Additionally, it would impose stricter transparency requirements on these providers, particularly regarding the methodologies used to generate ratings and the sources of information they rely on.
The ESMA will consider the feedback received to its credit rating consultation and will submit its Technical Advice to the European Commission by December 2024.
