International Regulatory Enforcement (PHIRE)

French and Dutch Financial Market Authorities Call for Europe-wide Regulation of ESG Data

December 24, 2020

By Tara K. Giunta,

Nicola Bonucci,

Jonathan C. Drimmer,& Quinn Dang

On December 15, 2020, the French and Dutch financial market authorities released a joint position paper that calls for European regulation pertaining to the provision of environmental, social and governance ("ESG") data, ratings, and related services.

The position paper recognizes that demand for ESG data and services is surging among investors and asset managers looking for sustainable investments and that there are a variety of ESG ratings and ESG-related tools and services available in the market.  The paper further notes that the differences between ESG ratings’ transparency on the underlying methodological choices “could be exploited to present a given investment as ‘greener’ than it actually is (greenwashing).” Furthermore, the position paper highlights the “risk of dependence upon a limited number of non-European providers, and potential conflicts of interest.”

As argued by the French and Dutch regulators, a regulatory framework for ESG data is therefore necessary for two reasons: first to prevent the “misallocation of investments, greenwashing, and [to] ensur[e] investor protection.”  Second, the regulators acknowledge that the ambitious European Green Deal will require additional private investments to meet 2030 climate and energy targets, and thus “investors and asset managers will need more reliable ESG data to support the shift to greener economies.”

The paper proposes a European mandatory framework to level the playing field and allow for proper enforcement.  It also calls for supervision at the European level by the European Securities and Market Authority ("ESMA") to oversee providers of ESG data, analysis, and services to ensure “a harmonised application of rules as well as uniform supervision.”  The position paper also recommends regulation that would introduce transparency requirements on methodologies and on identification and management of conflicts of interest.  However, the paper is careful to note that “regulation should not interfere with the methodologies.”  Any regulation should be calibrated, proportional, and follow a step-by-step approach.  Lastly, the regulation should cover specific requirements in terms of governance and internal control with specific attention to be given to the management of existing or potential conflicts of interest.

This call from European market authorities for greater transparency and comparable data on ESG should be welcomed for many in the ESG investing market, who have long sought standardized disclosures to better compare and evaluate companies' performance on sustainability and social goals.  At the same time, taking into account the imminent arrival of a new U.S. administration, this may trigger a standard-setting competition between Europe and the U.S. on the establishment of “a global standard” in an increasingly important issue for investors.

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