Money managers and consultants agree that the latest proposal from the European Commission to regulate ESG ratings providers is likely to help remove conflicts of interests in the ESG data market and improve the data overall.
The EC said Tuesday that it wants to improve transparency in the ESG data market through the new regulations.
Sources said the proposed regulations have the potential to split the businesses of ESG rating providers from other services they tend to offer, such as investing, consulting or credit rating.
"SKAGEN supports the move by the EU to regulate and qualify the work of ESG rating agencies. We hope that it will help remove vested interests between the ESG ratings of companies and consultancy services offered to the very same companies," Sondre Myge, head of ESG at SKAGEN Funds, said in an emailed comment.
Industry sources added that the ESG data market requires an overhaul that would improve the quality of ESG data, which investors and managers need for their sustainable investment strategies and reporting.
"Our experience is that agencies are glacial, reactive and often factually wrong or inaccurate on the information and data they provide to investors," Mr. Myge added.
Mr. Myge said managers would like to see clarification from regulators on which firms will be considered ESG rating agencies as well as the type of guidance they should give to make the data useful.
"Whilst this is a good start, there is still a lot of work to be done in our view. The first is a principled clarification on what ESG rating agencies are and are not — should the assessments converge, or should they disagree much in the same way as we see with buy/sell recommendations from analysts?" he said.
Emily Brock, principal consultant at ERM, global sustainability consultancy, added in a separate comment that the regulations will help to decrease the costs of ESG ratings.
She added that the commission will also require that ESG rating agencies be responsive to complaints from corporations about errors or other concerns in the rating process.