As part of its effort to improve the transparency and integrity of ESG ratings, the European Securities and Markets Authority (ESMA) is consulting on proposed rules and standards for rating agencies that provide ESG ratings.
The umbrella group of regulators issued a paper on draft standards, including disclosure standards, conflict of interest requirements and the information that firms must provide to regulators when seeking regulatory authorization.
In particular, ESMA is seeking feedback on proposed safeguards to mitigate the risks of conflicts of interest within ESG rating providers “in order to safeguard the independence of the assessment process.”
To that end, ESMA said that it “sees the establishment of Chinese Walls through organizational and physical measures as key to enable the segregation of functions and information barriers.”
These guardrails should go beyond legal formalities “to foster genuine operational separation and mitigate potential conflicts of interest,” it said — including digital access restrictions, internal controls and ongoing compliance reviews to ensure these measures are adequate and are being followed.
In terms of disclosure requirements, the proposals expand on the existing obligations for rating agencies to disclose the methodologies, models and key rating assumptions used in ESG rating activities.
The proposals also set out the information that firms must provide when seeking authorization from regulators, including any additional information that foreign rating firms must supply.
The deadline for providing input to the consultation is June 20. ESMA said that it intends to finalize its rules by October.