February 12, 2020 / 5:21 PM / 14 days ago

EU watchdog says ESG rating firms need rules to stop 'greenwashing'

LONDON (Reuters) - Agencies that issue ratings on how much companies and financial products are exposed to climate change need better supervision to help crack down on “greenwashing”, a top European Union regulator said on Wednesday.

FILE PHOTO: Chair of European Securities and Markets Steven Maijoor speaks at a European Financial Forum event in Dublin, Ireland February 13, 2019. REUTERS/Clodagh Kilcoyne

Asset managers have increasingly turned to so-called ESG ratings agencies that rate a company on its environmental, social and governance (ESG) aspects as investors seek to avoid putting cash into firms that contribute to climate change.

Greenwashing refers to products that wrongly claim to be sustainable.

Steven Maijoor, chair of the bloc’s European Securities and Markets Authority (ESMA) said the supervision of ESG ratings was “far from optimal”.

“The lack of clarity on the methodologies underpinning those scoring mechanisms and their diversity does not contribute to enabling investors to effectively compare investments which are marketed as sustainable, thus contributing to the risk of greenwashing,” Maijoor told a conference in Dublin.

“Personally I believe that, where ESG ratings are used for investment purposes, ESG rating agencies should be regulated and supervised appropriately by public sector authorities.”

European standards were also needed to give greater credibility to “green” bonds that use ESG ratings, Maijoor said.

“Here, I believe that public authorities are needed to provide the strong registration and supervision required to prevent greenwashing,” Maijoor said.

Financial firms need to be transparent on the ESG profile of the investments they make on behalf of clients, he said.

ESMA, along with its EU counterparts for insurance and banking, are therefore codifying what is required when firms market products that claim to have ESG characteristics.

Maijoor said ESMA will launch a public consultation before the end of March on specific disclosure requirements.

Writing by Huw Jones, editing by David Evans

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