EU watchdog tells rating agencies to improve ESG ratings disclosures

[February 10, 2022]    By Huw Jones

LONDON (Reuters) - Credit rating agencies need to improve how they refer to environment, social and governance factors in their ratings used by investors to direct huge sums into sustainable funds, the European Union's securities watchdog said on Thursday.

EU flags flutter in front of the European Commission headquarters in Brussels, Belgium October 2, 2019. REUTERS/Yves Herman

In the first half of 2021, assets in EU sustainable funds rose by 20% to 1.5 trillion euros, with credit rating agencies seeking to meet soaring investor interest in ESG factors, the European Securities and Markets Authority (ESMA) said.

The EU wants to increase this flow of funds to help its economy meet net zero targets, but regulators worry about 'greenwashing' or sustainable credentials being over-inflated to attract cash.

There is a "high level of divergence" among raters in their ESG disclosures "even for rated entities that are highly exposed to ESG factors", ESMA said in a statement.

The watchdog set out guidance in March 2020 on how and when raters' considerations of ESG factors in their ratings are disclosed to investors in press releases.

It looked at 64,000 press releases published between January 2019 and December 2020, finding that the overall level of ESG disclosures has increased since the introduction of the guidelines.

"However, there is clearly room for further improvement: the level of ESG disclosures differs significantly across both CRAs and ESG factors, especially environmental topics," ESMA said.

(Reporting by Huw Jones; Editing by Catherine Evans and Chizu Nomiyama)

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