ESG data providers, organisations responsible for providing high or low scores on environmental, social, and governance (ESG) principles, could be facing increasing scrutiny from regulators on their data quality.
Pierre Bollon, who serves on the European Economic and Social Committee (EESC) and is a representative of AFG, a French Asset Management Associate, has suggested that ESG data providers face more scrutiny from regulators on the quality of data and ratings they provide.
Bollon made these comments at a conference in Paris last week and comes at a time when regulators are considering tighter controls on the sector to reduce false claims about “green” credentials.
The role of ESG in investing
According to Bollon, data providers are playing an increasingly important role in the finance industry because of their integral role in investment and should be facing the same regulatory scrutiny as asset managers, brokers, and stock exchanges.
ESG data indicates how a project could holistically affect society, such as employee well-being and sustainability and has been used in recent years by investors who want to ensure that the projects they are investing in have an overall net positive effect.
Output from data providers is used as a benchmark to set indicators that can inform an investment strategy for different financial products, including exchange-traded funds that amount to $10 trillion in value.
Moreover, policymakers are also asking for ESG insight to ensure that any future projects have minimal impact on the environment and are in line with the government’s zero carbon goal. Hence, ESG has become integral to the investment process in a short time.
Why is ESG receiving more scrutiny?
However, using ESG as an investment tool is a recent development, making it a largely unregulated entity and European security regulators have raised concerns over the consistency and transparency of the data provided.
Furthermore, the European Securities and Markets Authority (Esma) has received feedback stating that the ESG data sector is growing but still immature and have highlighted several concerns on transparency, the basis of ratings, and the timing for feedback. Critically, organisations are undermining the value of ESG data by making false claims to higher green credentials than they are.
Given concerns about transparency and data quality, we can expect regulators to pay more scrutiny to the quality and production methods of ESG data.