Pressure grows on regulators to scrutinise ESG data providers

Pressure is growing on regulators to formally scrutinise the data and rating providers who award investments high or low scores on environmental, social and governance (ESG) principles.

An influential member of an advisory board to the European Commission has added his voice to calls for ESG data and ratings providers to be regulated amid growing concerns about greenwashing in the asset management sector.

Pierre Bollon, who serves on the European Economic and Social Committee (EESC) and is a general representative of AFG, the French Asset Management Association, said data providers were playing an increasingly important role in the investment industry and should be subject to the same regulatory scrutiny as other parts of the financial services sector.

“Companies are being asked by investors to produce more and more information on ESG, as this becomes more mainstream, but there is no standardisation of this information,” said Bollon, whose board advises the European Commission on employers’ issues.

“Data providers are now a key part of the financial chain and I do not see why this key part — ratings are important — isn’t under scrutiny somewhere,” he added, pointing out that, in contrast, asset managers, brokers and stock exchanges were all regulated.

Globally, asset managers and owners are under increasing pressure from policymakers and customers to provide information on the ESG impact of their funds and investment holdings as part of a wider net zero carbon emissions push. 

Output from data providers is used to construct indices that determine the investment strategy of a wide variety of financial products, including the $10tn exchange traded funds industry.

A recent call for evidence on the burgeoning ESG data market by the European securities regulator found those using the services had a range of concerns over the consistency and transparency of data provided.

Bollon’s comments, at a high level conference of world pension leaders in Paris last week, come as regulators around the world consider tighter controls on the sector to reduce false claims about “green” credentials of funds.

Last month the European Securities and Markets Authority (Esma) said feedback it had received on the ESG data sector showed “an immature but growing market” which, following several years of consolidation, has seen the emergence of a small number of large non-EU headquartered providers.

However, bodies that gave evidence to Esma highlighted “some degree of shortcoming” in their interactions with the rating providers, “most notably on the level of transparency as to the basis for the rating, the timing of feedback or the correction of errors”.

There are currently about 59 ESG rating providers active in the EU including a small number of very large non-EU providers, according to Esma data.

“Esma will continue supporting the European Commission in their assessment of the need for introducing regulatory safeguards for ESG ratings,” said Esma.

The European Commission was contacted for comment.

The UK’s Financial Conduct Authority last month said it saw a “clear rationale” for regulatory oversight of certain ESG data and rating providers.

“We stress that market participants and consumers must be able to trust green and other ESG-labelled financial instruments and products,” said the FCA.