According to the European Commission, ESG ratings require new laws

The European investment management sector has requested the European Commission to create an EU legal framework for ESG evaluations.

The European Fund and Asset Management Association (EFAMA), which conducted research into the ESG ratings of more than 15,000 Article 8 and 9 funds, has recommended the action.

In most cases, the ratings are intended to assess the ESG credentials of financial products provided by specialized suppliers.

The trade group, which has 59 corporate members, 25 associate members, and 27 member associations, forecasts that the usage of these ratings is about to "grow rapidly."

According to this, this is as a result of "investor demand" for information on funds brought about by the Sustainable Finance Disclosure Regulation (SFDR).

The SFDR is a European rule that requires asset managers to disclose ESG factors in order to increase transparency in the market for sustainable investments.

According to the EFAMA, a new rule that went into effect in August 2022 requires financial advisers and fund distributors to take customers' sustainability preferences into account when making product recommendations.

After examining the ESG ratings given by two for-profit companies, Refinitiv and Morningstar, it came to its findings.

It examined 6,250 Morningstar offers worth 3.3 trillion in August 2022 and 9,315 Refinitiv ESG-labeled funds valued at 4.3 trillion euros.

It found that while there were a few discrepancies, the average ESG ratings for Article 9 funds are somewhat higher than those for Article 8 funds.

Additionally, it discovered a little but favorable link between the evaluations at the two suppliers.

In order to "ensure the market for ESG ratings functions well in the future," the EFAMA has called on policymakers to create an EU regulatory framework with three major goals.

The EFAMA wants to examine: 

1. a requirement to disclose methodologies and data sources used to provide ESG ratings

2. the provision of a level playing field by ensuring all major firms assigning ratings to funds domiciled in the EU are within scope, including non-EU providers generating a certain percentage of EU revenues

3. the preservation of market integrity by setting specific requirements for internal controls and governance processes to avoid conflicts of interest

It has also demanded that regulatory bodies guarantee a competitive market for ESG ratings so that a select few service providers cannot charge exorbitant prices for their offerings.

By fLEXI tEAM