PensionsEurope has said it shares the European Commission’s (EC) concerns about environmental, social and governance (ESG) ratings and factors in credit ratings.

In response to the EC’s consultation on ESG ratings and factors in credit ratings, the organisation said it shares “many of the commission’s concerns about their shortcomings, and we also welcome the commission’s further work to improve the ratings and the functioning of the market”.

“In our input, we propose to adopt a holistic and coordinated regulatory approach to both financial and non-financial (ESG) data in the EU, as well as establishing a proper regulatory framework for data providers. This consultation concerns ESG ratings,” PensionsEurope wrote.

In regard to pension funds, it said that the main challenges centre around ESG data, as there is a lack of “reliable and accurate” ESG data, which pension funds need to report under the sustainable finance disclosure regulations (SFDR).

“The growth of the ESG market has led to an increase in data, but that has also added to confusion in the market. PensionsEurope encourages the European Commission to closely monitor the ESG data offer and its comparability between providers.

“However, there are also issues relating to ESG ratings. There are concerns around transparency which leads to a lack of understanding what the ratings represent. ESG ratings vary a lot by ratings provider, as they use their own unique methodologies for assigning company-specific ratings, and only few companies disclose the underlying indicators or their actual weights of their assessment,” Pensions Europe wrote.

The organisation also raised the potential for conflicts of interest across the business models and product offerings of sustainability-related product and service providers. For instance, when providers both assess companies and offer paid advisory services or charge companies to see their own reports.

“Finally, the European pension funds have also been concerned that the available data is more and more provided by few specialised agencies headquartered in the US. In general, the ESG rating market has rather oligopolistic characteristics and another concern is that these agencies might have views, analyses, and opinions on ESG matters different from those in Europe, particularly on climate change issues. This information can be biased in the EU context, as there is a recognition that availability of data is jurisdiction dependent,” it stated.

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