The European Commission has been urged to develop an EU regulatory framework for ESG ratings by the voice of the European investment management industry.
The European Fund and Asset Management Association (EFAMA) has made the recommendation after carrying out research into the ESG ratings of more than 15,000 Article 8 and 9 funds.
The ratings are predominantly used to evaluate the ESG credentials of financial products offered by specialised providers.
The trade body, which has 27 member associations, 59 corporate members and 25 associate members, predicts the use of these ratings is about to ‘grow rapidly’.
It says this is due to ‘investor demand’ for insights into funds introduced by the Sustainable Finance Disclosure Regulation (SFDR).
The SFDR is a European regulation introduced to improve transparency in the market for sustainable investment and imposes mandatory ESG disclosure obligations for asset managers.
The EFAMA says the increase in demand has been triggered by a new requirement since August 2022 for financial advisors and fund distributors to consider clients’ sustainability preferences and propose products that meet their needs.
It drew its conclusions after analysing the ESG ratings assigned by two commercial providers – Refinitiv and Morningstar.
It looked at 9,315 Refinitiv ESG-labelled funds valued at 4.3 trillion euros as of August 2022 and 6,250 Morningstar offerings worth 3.3 trillion in the same month.
It discovered the average ESG ratings for Article 9 are slightly higher than those for Article 8 funds but that the differences were minimal.
It also found there was a small but positive correlation between the ratings at both providers.
The insights have led EFAMA to call for policymakers to develop an EU regulatory framework with three main objectives in order to ‘ensure the market for ESG ratings functions well in the future.’
The EFAMA wants to see:
- a requirement to disclose methodologies and data sources used to provide ESG ratings
- the provision of a level playing field by ensuring all major firms assigning ratings to funds domiciled in the EU are within scope, including non-EU providers generating a certain percentage of EU revenues
- the preservation of market integrity by setting specific requirements for internal controls and governance processes to avoid conflicts of interest
It has also called for supervisory authorities to ensure a competitive market for ESG ratings that does not allow a small number of providers to set excessively high fees for their services.
*Correction: The headline of this story was corrected to make it clear that it is EFAMA, and not the European Commission itself, calling for a regulatory framework for ESG ratings. Apologies.
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