SUSTAINABILITY STAMPS FOR companies may be subject to stricter regulation in the future under a new proposal from the European Commission.
Currently, ESG ratings are used to ‘score’ companies on environmental, social and governance factors, but there is a lack of uniform standards for what such ratings mean or what a company must do to receive or maintain one.
The EU Commission has proposed a regulation to improve their transparency and reliability by setting out clearer organisational principles for the ratings and rules to prevent conflicts of interest.
EU Commissioner for Financial Markets Mairéad McGuinness said that “at the moment, this area is completely unregulated”.
“Therefore, if it’s unregulated, it’s very difficult to compare information between these rating agencies and it’s difficult then to interpret what they mean,” the Commissioner said.
“We don’t have clarity on how these ratings are reached or what they measure and there seems indeed to be issues around conflict of interest by ESG rating providers,” she said.
“So our proposal is about making ESG ratings transparent, comparable and reliable.”
ESG rates are used in the EU sustainable finance market to provide information to investors and financial institutions in areas such as investment strategies and risk management.
The regulation should improve the quality of this information by making clearer what constitutes a ‘sustainable’ investment.
The proposal also sets out that ESG rating providers offering services to investors and companies in the EU should be authorised and supervised by the European Securities and Markets Authority (ESMA).
McGuinness recently expressed to The Journal that Ireland’s upcoming automatic-enrolment pension schemes should provide transparency to pension holders about whether their money is being invested sustainably.
The Irish government is currently working on legislation to introduce an auto-enrolment pension scheme that would involve employees’ contributions to their pension being matched by their employer as a percentage of the employee’s gross income and further topped up by the State.
The scheme would apply to around 750,000 workers between the ages of 23 and 60 who are employed but not signed up to an occupational pension scheme, though workers would have the choice to opt out.
The Oireachtas Committee on Social Protection, comprised of TDs and senators, recently published a report scrutinising the plan, offering 21 recommendations to Government.
One such recommendation was that investment funds in the scheme should be prohibited from investing in fossil fuels or the arms industry.
It further recommended that a minimum percentage of the funds should be invested in Irish renewable energy developments and called for the bill to explicitly state that investment ‘good practice’ should include consideration of sustainability and environmental, social and governance (ESG) factors.
Ireland’s 2019 Climate Action Plan included a measure to consider how a new requirement could be placed on pension providers to give holders more information about whether their money was invested in fossil fuels and alternative options.
However, a working group tasked with examining the action concluded it should be considered in “broader terms” than a “strict requirement” on pension providers, and the proposal was not progressed further in subsequent climate action plans, a Noteworthy investigation found.
Diverting finance away from fossil fuel companies – a strategy known as divesting – is seen as one way of pushing the industry to turn instead to renewable energy development and reducing its capacity to contribute to the climate crisis, which is already causing substantial impacts for humans and nature.
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