The European Union’s securities watchdog on Thursday launched a review of the bloc’s fast growing but largely unregulated market for environmental, social and governance (ESG) ratings on companies.

Trillions of dollars have flowed into sustainable investments globally, using ESG ratings on companies as a guide of their ‘green’ credentials.

“This call for evidence seeks to develop a picture of the size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU,” the European Securities and Markets Authority (ESMA) said in a statement.

“ESMA is looking to complement this picture by collecting views and experiences from the users of these ESG rating providers, as well as those entities covered by ESG rating

providers.”

The unregulated nature of the sector is becoming a more pressing issue for the authorities as new rules are being rolled out that mandate ESG disclosures by companies, which will increase demand for ratings.

Last November, global regulators set out the first global principles or framework to begin policing ESG investment ratings to help combat ‘greenwashing.’

Without rules, it is harder for regulators to punish misleading claims.

ESMA said on Thursday there was a need to “match the growth in demand for these products with appropriate regulatory requirements”.

The information gathered will be used alongside a further public consultation to develop an impact assessment on the costs and options of a possible EU intervention, ESMA said.

Some investors say the patchwork of methods used across the sector to compile ratings are opaque, leading to differences in ESG ratings on the same company, forcing asset managers to subscribe to many providers.

Source: Reuters