AFM and AMF position paper on a European Regulation for the provision of ESG data, ratings, and related services.
On 15 December 2020, the Dutch Authority for the Financial Markets (‘AFM’) and the French Financial Markets Authority (‘AMF’) published a position paper in which they call for a European regulatory framework on the provision of ESG data, ratings, and related services. The key point the AFM and AMF argue is that providers of sustainability data and related services must be regulated to prevent misallocation of investments, greenwashing, and ensuring investor protection.
The aim of the position paper is to contribute to the current debate on the transparency, accuracy and reliability on ESG data, ratings, and related services offered by Sustainability-related service providers (‘SSPs’) to financial market participants.
This paper covers three questions.
What is the role of sustainability-related data, analysis and services in the financial system?
ESG data play an important role in matching supply and demand for sustainable investment. Investors and asset managers looking for sustainable investments need reliable ESG data and ESG-related services to support the shift towards greener economies. Furthermore, ESG data is relevant, in order to allow for the integration of sustainability risks and opportunities in the decision making process, to disclose such risks where relevant, and to properly assess the long-term values of their (potential) investments. FMPs need this data to comply with the European regulatory framework on sustainable finance, including the SFDR and the Taxonomy Regulation.
Why do we need to regulate providers of ESG data and services?
SSPs remain largely unregulated. A variety of measurement methods are used to generate sustainable data and assessments. There is a lack of transparency on these methodologies, which leads to risks of misallocation and missed opportunities. There is risk of mismatches between the expectations of the investor and actual ESG performance of the investment. Moreover, sustainability data is not always consistent, comparable and reliable.
What should this regulation look like?
Taking in consideration the mentioned considerations, the AFM and the AMF propose an ad hoc European mandatory regulatory framework for SSPs. Within this framework, providers that wish to provide services to European companies should be subject to authorisation and supervision by ESMA, and should be required to operate through an establishment located in the European Union. The regulatory focus will be on transparency about methodologies, potential conflicts of interest, and governance and internal control requirements. AFM and AMF advocate for a step by step approach: a set of core requirements for SSPs that serves as a starting point, to be reviewed periodically taking into account market developments and, where appropriate, complemented by additional measures. The scope of the regulation should be well-calibrated to take into account the innovation and the diversity of products offered.