The European Fund and Asset Management Association (Efama) has commended the European Parliament’s approval of new environmental, social and governance (ESG) ratings regulations on Thursday 22 February, as a pivotal advancement for transparent investment but added that further regulatory measures are required to include all ESG data products to combat greenwashing and uphold transparency in ESG reporting.

The European trade group noted that the legislative move mandates clearer disclosures concerning the ESG factors, including their respective weightings and the methodologies employed in their evaluation. Furthermore, to mitigate conflicts of interest, ESG rating providers will be prohibited from offering credit rating, auditing or consultancy services.

The regulation stipulates that ESG ratings providers operating within the European Union must now obtain authorisation and come under the supervision of the European Securities and Markets Authority (Esma), while providers outside the EU will need to secure endorsement, recognition or equivalence to offer their services within the EU.

For financial market participants already under regulatory governance and disclosure requirements, the legislators adopted a balanced approach towards internally produced ratings. This approach acknowledges the distinct nature and application of these ratings compared to those provided by external entities, thereby avoiding unnecessary duplication of legal obligations while maintaining a focus on transparency, Efama said.

Despite these advances, a regulatory void persists concerning other types of ESG data products, Efama in its press release on Thursday 22 February. The International Organisation of Securities Commissions (Iosco) and Esma have both underscored the necessity for comprehensive regulatory frameworks that encompass all ESG data products. Such frameworks are crucial to prevent greenwashing and to ensure the integrity of ESG reporting, argued Efama. In response to this regulatory gap, the UK has seen an industry-led initiative under the guidance of the Financial Conduct Authority, which resulted in the development of a code of conduct for ESG data and ratings providers.

Chiara Chiodo, a regulatory policy advisor at Efama, emphasised the importance of transparent and comprehensive ESG information for enabling investors to make informed decisions regarding sustainable financial products. Chiodo highlighted the regulation of ESG ratings as a vital step towards fostering a greener economy and concluded, “Hopefully, EU policymakers will be looking at remaining ESG data issues when setting their priorities to boost the capital markets union during the next legislative mandate.”