13 June 2019

ECMI - Sustainability in practice: ratings, research and proprietary models

The CRAs and SRPs pursue different objectives, and are currently at very different stages in terms of market development and regulatory frameworks. Looking at the experience with CRAs, policymakers and stakeholders should reflect in more depth about the optimal market structure for SRPs. There is still quite a significant amount of experimentation in this space. Hence, it might be hazardous to move too quickly on the regulatory side and risk impeding the innovation that is still taking place. Proceeding with caution might be the only ‘reasonable’ way forward in the new legislative cycle.

It is important to distinguish between credit and sustainability ratings. These are currently at very different stages in terms of market development and regulatory frameworks. While an essential part of the financial ecosystem, credit ratings are simply one of the many variables that investors consider in their financial decision-making.

The value proposition for sustainability ratings, i.e. pricing instruments, asset allocation and risk management, will continue to evolve for both issuers and investors as sustainable finance becomes more mainstream. More standardised disclosure from firms, and transparency on what ESG ratings measure or the objectives of investors are prerequisites.

Looking at the experience with CRAs, policymakers and stakeholders should reflect in more depth about the optimal market structure for SRPs. There is still quite a significant amount of experimentation. What is needed is a better understanding of the building blocks of E, S, and G, and the associated market practices in sustainability ratings/scores/assessments.

It might also be hazardous to move too quickly and risk impeding the innovation that it still taking place in the SRPs. Decisions about whether this area needs to be regulated further are highly likely in the new legislative cycle. Relevant actors will have to weigh up the different options but proceeding with caution might be the only ‘reasonable’ way forward.

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