PensionsEurope has issued its response to the European Securities and Markets Authority’s (ESMA) consultation on amendments to the Credit Rating Agencies Regulation (CRAR).

The consultation sought views on how the Delegated Act and the annex of the Credit Rating Agencies could be amended to ensure that relevant environmental, social and governance (ESG) risks were systematically captured in credit ratings, and to improve transparency on the inclusion of ESG risks by credit rating agencies in credit ratings and rating outlooks.

PensionsEurope “broadly agreed” with the amendments proposed by ESMA, including the proposed changes to Article 3, 6 and 7.

However, it highlighted that credit rating agencies could provide more detailed explanations about their methodological approach, rather than only identifying them.

On the proposed changes in Article 4(2) to the delegated regulation, PensionsEurope noted that the regulation “rightly” emphasised that credit rating agencies should provide a ‘detailed explanation’ of the qualitative and quantitative factors in their credit rating methodologies.

“Key variables, data sources, key assumptions, modelling, and quantitative techniques are crucial elements in determining the accuracy of the final ratings,” PensionsEurope stated.

“These elements should not only be identified, but also thoroughly explained within the methodology process.”

Furthermore, PensionsEurope argued that each ESG factor should be explicitly stated using the full terms, rather than the abbreviation, to ensure a clear and accurate interpretation of these factors.

“It is also important to maintain a ‘detailed explanation’ regarding the significance of each environmental, social, or governance factor,” the association noted.

“Credit rating agencies must have a clear understanding of how to apply these factors in their ratings and ensure that all agencies follow the same procedures and rules.”

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