Need for ESG Data Regulation Outlined by European Asset Managers

EFAMA criticises costs, comparability and market concentration of ESG data, research and ratings.

European asset managers have called for regulation of ESG ratings, research and data, stating that “solid and reliable” inputs are a pre-requisite to offering sustainable investment products and supporting the intended aim of European regulatory framework on sustainable finance to reduce ‘greenwashing’.

The European Fund and Asset Management Association (EFAMA) expressed support for a series of recommendations issued recently by France’s Autorité Des Marches Financiers (AMF) and the Dutch Autoriteit Financiële Markten (AFM).

A joint paper by the two financial market regulators advocates for regulatory focus on methodology transparency, conflicts of interest, governance and market innovation. It calls for a regulatory framework requiring establishment of sustainability-related service providers (SSPs) in the EU and supervision by the European Securities and Markets Authority, but recommends a step-by-step approach with core requirements complemented by additional measures where necessary over time.

EFAMA flagged the rising costs of ESG data, driven in part by growing market concentration, which the trade association describes as “particularly detrimental to smaller firms which have less resources and bargaining power, and to end-investors who ultimately foot the bill”.

As well as noting the lack of comparability and reliability of ESG data and research, EFAMA also called for greater transparency regarding methodologies used by third-party providers in data gathering and processing. Increased transparency, EFAMA argued, would allow asset managers to more closely ascertain the safety of provided information as they create development strategies.

EFAMA also drew attention to potential conflicts of interest, due in part to the range of products offered by third-party providers, driven partly by market concentration.

“Given the lack of publicly available information, asset managers are heavily reliant on the information from third-party providers of ESG data, research and ratings, which comes with high costs and many questions,” said Giorgio Botta, EFAMA’s Regulatory Policy Advisor.

To enable improvement of research and ratings quality, EFAM said providers should “step up” their dialogue with rated companies in order to produce information which better captures the context in which companies operate.

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