ESG ratings agreement marks a “crucial” step, but “gaps” exist: Efama

The European Parliament’s approval of ESG ratings regulation marks a significant step towards transparent and reliable ESG-related ratings for investors, according to the European Fund and Asset Management Association (Efama).

As the voice of the European investment management industry, Efama stated that it expects mandatory disclosures on environmental, social and governance factors, along with their weights and methodologies to become “clearer” in times ahead. ESG rating providers will also not be allowed to provide credit rating, auditing or consultancy services to avoid conflict of interest, it pointed out.

Efama proposes SFDR overhaul for improved transparency

“EU-based ESG ratings providers will now be authorised and supervised by the European Securities and Markets Authority and those from outside the EU will require endorsement, recognition or equivalence to provide their services within the EU,” stated Efama.

According to the body, legislators took a “balanced approach” for internally produced ratings among financial market participants, acknowledging distinctions from external ESG ratings providers. “This pragmatic approach prevents duplication of legal obligations while ensuring transparency,” stated Efama.

Efama suggests solutions for retail investment strategy

Despite progress, Efama noted a “gap” in regulating other ESG data products in the EU, urging EU legislators not to delay, advocating for prompt development of regulatory frameworks or a code of conduct for third-party ESG data products.

Transparent, complete ESG information empowers investors to confidently choose sustainable financial products, said Chiara Chiodo, regulatory policy advisor at Efama. “Covering ESG ratings in this regulation is a necessary step forward to drive the transition towards a greener economy. 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,” added Chiodo.

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