Amendments to European Union Credit Rating Agencies Regulation should require that credit rating agencies (CRAs) provide more detailed explanations about their methodological approach, rather than only identifying them, according to PensionsEurope.
In a response to the European Securities and Markets Authority’s (ESMA) consultation on amendments to the regulation, PensionsEurope said that key variables, data sources, key assumptions, modelling, and quantitative techniques were crucial elements in determining the accuracy of the final ratings.
“These elements should not only be identified, but also thoroughly explained within the methodology process,” PensionsEurope stated in its response.
“Additionally, each ESG factor should be explicitly stated using the full terms ‘environmental’, ‘social’, or ‘governance’ instead of abbreviations. This ensures a clear and accurate interpretation of these factors,” the response continued.
PensionsEurope said it was also important to maintain a “detailed explanation” regarding the significance of each environmental, social, or governance factor. CRAs 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.
A year ago the European Commission proposed a new set of rules to force ESG ratings providers to comply to stricter requirements, in an effort to improve transparency and governance of a business that is perceived at times as opaque, impairing a proper investment decision-making process.
EU rulemakers reached a provisional agreement on the regulation seven months after the Commission’s proposal, with it being widely welcomed by the investment industry.
In its response, PensionsEurope said it “broadly agree[s]” with the amendments proposed by ESMA, but it reiterates the need for CRAs to provide more detailed information about their methodological approach.
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