European Commission had assigned two tasks to the European Securities and Markets Authority (ESMA) in the Action Plan on Sustainable Finance. First was to address environmental, social and governance aspects in the final guide published by the Authority, and the second was to evaluate the current practices in the credit rating market on sustainability.
The European Securities and Markets Authority (ESMA) has published the Authority’s technical advice and final guidelines in July. The final guideline provides recommendations for improving quality and methodological consistency between the statements of credit rating agencies. The guideline also provides recommendations to increase transparency when defining sustainability in credit rating processes. By accomplishing that, the institutions and individuals benefiting from the ratings will be informed about which environmental, social and governance factors effecting the rating actions.
The technical report was developed based on the existing sustainability practices in the credit rating market. The report examines which factors are considered environmental, social and governance (ESG) by credit rating agencies. It is stated that the evaluation of the current practices in terms of sustainability is beyond the purpose of the credit rating institutions. The report does not recommend that regulations applied to Credit Rating Agencies be changed in terms of sustainability so as to mandate it in every rating process. Instead, it urges the European Commission to assess regulations that safeguard products and services that meet the demand for sustainability assessments.
Reports conclude that, credit rating agencies consider ESG factors in their assessments. However, the extent to which these factors are included varies according to the different methodologies applied by different organizations and asset classes.