The implementation of the European Green Deal will be expensive. Even before the pandemic, an investment volume of at least one trillion euros over the next ten years (from 2020) was estimated for this. In addition to public funds, the second pillar is to consist of private investors.
The financial industry plays a key role in this. With the “Renewed Sustainable Finance Strategy” – RSFS for short – the EU plans to strengthen sustainable investments, to align the frameworks in such a way that green financing can be provided, and to introduce the minimization of climate and environmental risks via the financial system, thus contributing to a “greening of financing.” LBBW provides information about that.
Read more on the subject and find other important financial headlines with the Born2Invest mobile app.
Market participants other than banks are also in the focus
These include, in particular, the rating agencies. “Both the classic credit rating agencies (CRA) and the ESG rating agencies enjoy special attention here,” said Alexandra Schadow, Senior Investment Analyst at LBBW. The EU is set to become climate neutral by 2050.
ESMA is moving ahead: ESG rating agencies should be regulated
As part of a consultation on the RSFS from April 8th, 2020 to July 15, 2020, the EU Commission explicitly asked about ESG rating agencies, which have so far been completely unregulated. This concerns both the market concentration of the rating agencies and the quality of the analyses. The results of the consultation, in which a total of 648 organizations and individuals participated, were presented on February 10th, 2021. ESMA (European Securities and Markets Authority) also participated. In addition, it already wrote an open letter to the EU Commission on January 28th, 2021 with the clear demand to regulate ESG rating agencies.
ESMA’s open letter to the EU Commission
At the core of ESMA’s argument is the growing importance of sustainable finance. Reliable assessments with high quality based on robust information are needed to assess and evaluate sustainable investments. Without legally binding rules, the risk of misallocation of capital, the sale of false products, and so-called “greenwashing”.
ESG ratings are highly dispersive
ESMA highlighted that the agencies’ ESG ratings have a very high dispersion compared to credit ratings. That in turn can have very different consequences when they are used; for example, in the composition of an ESG benchmark index that is based on ESG ratings.
Ultimately, ESMA calls for the following points to be considered in a regulation for ESG ratings:
1. general legal definition of what an ESG rating is and what it says.
2. any legal entity publishing ESG ratings should be subject to mandatory registration and public oversight.
3. specific minimum requirements for ESG ratings should be formulated with reliable data basis and robust methodology.
4. consideration of the current competitive situation with large and small providers in the formulation of regulatory requirements, whereby regulations can be eased for smaller competitors.
ESMA calls for regulatory action
ESMA gets support from participants in the consultation. An overwhelming majority of 74 percent believe the EU should take action regarding sustainability ratings and research. The greatest desire here is for the formulation of minimum standards for transparency and quality. In addition, ESMA is concerned about the high degree of consolidation that ESG rating agencies have now achieved. Here, ESMA is in good company. During the consultation, out of a total of 400 participants, 30 percent were rather concerned and 18 percent very concerned about the emerging oligopoly.
Concentration as in the traditional credit rating business
Indeed, in our view, the development in recent years is remarkable and shows many parallels to the competitive landscape of classic rating agencies. The ESG ratings market is highly dynamic, and especially since 2018, the big players have been swallowing the small ones. Not only classical rating agencies are getting involved, but also other financial information providers. This can be observed very impressively.
Rules are justified
ESMA is addressing two main “pain points” regarding the future of ESG ratings. First, the management of financial flows into sustainable projects and ventures, which is a key concern of the European Green Deal, should be flanked by an adequate ESG rating system. On the other hand, ESMA observes the oligopolization of the market for ESG ratings with concern.
Uwe Burkert, Chief Economist and Head of Research at LBBW, said: “In our view, both concerns are understandable. The risks of greenwashing and misallocation of capital must be avoided at all costs, in our view. And an oligopoly, similar to the case of the classic credit rating agencies, must be avoided in the interest of the diversity and innovative capacity of a still young market segment. However, consolidation is already well advanced, and the rating agencies and other large financial service providers will not give up this lucrative future topic without a fight. Rather, they will try to integrate this segment more and more into their existing business model.”
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.
First published in INSTITUTIONAL Money.com, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
Although we made reasonable efforts to provide accurate translations, some parts may be incorrect. Born2Invest assumes no responsibility for errors, omissions or ambiguities in the translations provided on this website. Any person or entity relying on translated content does so at their own risk. Born2Invest is not responsible for losses caused by such reliance on the accuracy or reliability of translated information. If you wish to report an error or inaccuracy in the translation, we encourage you to contact us.
MATIC Share Price Forecast: What Does Polygon Expect in the Current Bear Market?
Cryptocurrencies such as Bitcoin and Polygon have a close correlation with stocks. In most cases, they rise when leading indexes...
Coima sgr’s Porta Nuova Centrale Fund Secures €173.5 Million Green Financing
Coima sgr, founded and led by CEO Manfredi Catella, ended 2021 with assets under management up 6 percent to $9.74...
Canopy Growth Sales Disappoint, Stock Under Pressure
Just a week before announcing its latest numbers, Canopy announced its latest acquisition: the purchase of California-based cannabis extraction and...
Solidarity Day 2022: Ganzourgou Producers Offer 2.6 Tons of Food to Vulnerable People
Regarding the selection criteria of vulnerable people, Ambroise Ouédraogo said that his association collaborates with the provincial directorate of Social...
Ford Chooses Almussafes over Germany for the Production of Electric Models
Thus, the Valencian factory will be the fifth Spanish factory to produce all-electric models. Stellantis manufactures electric models at its...
Biotech1 week ago
Satellos Bioscience’s Stem Cell Signaling Research Could Turn the Tables on Muscular Dystrophies
Crypto2 weeks ago
Solana Price Forecast: SOL Forms a Dead Cat Bounce
Crowdfunding2 weeks ago
Exporo Raises Funds, but the Company Value Decreases Instead of Increasing
Cannabis1 week ago
Luis Figo Launches His Brand of CBD Products