Europe Told to Let ESG Raters Offer Consultancy  

The European Commission has been urged to reconsider a prohibition on consultancy services as part of its proposed regulation for ESG rating activities. In a joint submission to Europe’s consultation on the proposed regulation, the Credit Rating Research Initiative, the Climate Finance Fund, and the Croatan Institute focused on one particular element which they said, “has emerged as being pertinent”. The regulation has a proposed prohibition on ‘consultancy services’ by ESG rating agencies. But while, in the traditional credit rating sector, the provision of consultancy services contains inherent harm because the sector is an oligopoly, this isn’t necessarily the case for the ESG ratings space, the joint submission said. It noted that in the ESG rating space there was not an oligopoly forcing users into a distinctive group of agencies which could then exert pressure, and that the predominant model of remuneration focused on investors, not companies. “Investors may then utilise consultancy services to successfully onboard the ESG ratings into their investment processes, which can be complex,” said the submission. “Depriving investors of this opportunity could cause problems for the development of the ESG rating space, as investors may struggle to understand and incorporate the usefulness of ESG rating agencies. Given the nascency of the ESG rating space, such a prohibition may not be wise.” They recommend that the prohibition of consultancy should only be preserved if an ESG rating agency declares to the European Securities and Markets Authority (ESMA) that it will be moving to the ‘issuer or company pays’ model of remuneration, or if the market for ESG ratings becomes concentrated, and is acknowledged, by ESMA, as representing an oligopoly.  

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