The European Commission Action Plan: Action 6

The European Commission Action Plan: An assessment of the reform areas for PRI signatories provides an overview of the main reform areas. Action 6 focuses on better integrating sustainability in ratings and research.

Key points

Starting in the second quarter of 2018, the Commission will engage with stakeholders to explore the merits of amending the Credit Rating Agency Regulation to mandate credit rating agencies to explicitly integrate sustainability factors into their assessments. This should be pursued in a proportionate way, to preserve market access for smaller players. Commission services will report on the progress made on this by the third quarter of 2019.
The Commission invites ESMA to: (i) assess current practices in the credit rating market by mid-2019, analysing the extent to which ESG considerations are taken into account; (ii) include environmental and social sustainability information in its guidelines on disclosure for credit rating agencies by the same point, and consider additional guidelines or measures, where necessary.
The Commission will carry out a comprehensive study on sustainability ratings and research by mid-2019. It will analyse methodologies and explore aspects such as the market structure of sustainability ratings and market research services, the depth and breadth of sustainability research assessments and scoring, and the independence of those research/scoring providers. The study will also explore measures to encourage sustainability ratings and market research.

Comment

The focus of the European Commission’s action plan on sustainability and credit ratings is testament to the role that these instruments play in improving sustainability-risk-adjusted capital allocation. The Commission is taking a prudent approach, calling for more time to conduct research, monitor developments and gather evidence before making concrete policy and regulatory changes. This will allow broader engagement with stakeholders and give greater recognition to important ongoing developments.

The action plan has retained the HLEG’s distinction between the two main categories of rating providers: credit rating agencies and sustainability ratings providers. The action plan also mentions market research, which both can provide. The Commission’s overall assessment of these market agents gives equal consideration to credit ratings and sustainability ratings.

All planned deliverables listed above are due by the second quarter of 2019 at the earliest. This effectively defers action to the new Commission, to be appointed after the 2019 spring EU parliamentary election.

In the meantime, progress by credit ratings agencies on sustainability issues is likely to continue in the coming months. This will probably be driven by market interest, as fixed income investors join equity investors in starting to incorporate ESG considerations in portfolio allocation. It is the PRI’s intention to continue to promote dialogue between investors and both credit ratings agencies and sustainability ratings providers, on how to make ESG considerations more transparent systematic and financially relevant.