French and Dutch financial market authorities want EU regulation of greenwash

The Autorité des marchés financiers (AMF) and its Dutch counterpart, the Autoriteit Financiële Markten (AFM), propose a European regulatory framework for providers of sustainability-related services, which could become one of the key measures of the European Commission’s renewed sustainable finance strategy. The proposed framework is aimed at preventing misallocation of investments, greenwashing, and ensuring investor protection. It includes requirements on transparency on methodologies, management of conflicts of interest, internal control processes, and enhanced dialogue with companies subject to sustainability ratings.

Fostering the green transition in Europe will require significant investment over the coming years; the European Green Deal estimates that €260 billion needs to be mobilised annually by 2030. The influence of Environmental, Social and Governance (ESG) factors on the investment decisions of retail investors and asset managers is substantial and likely to grow. At the same time, increasing regulation on sustainable finance fuels the demand for ESG data by investors.

ESG data and service providers play a an important role in the investment allocation process. To meet investors’ growing needs for sustainability-related data and analysis, the quality and reliability of these data and related services are vital. While their influence is expected to grow considerably, providers of sustainability-related services remain largely unregulated.

A regulatory framework would make it possible to avert certain risks for investors, such as misallocation of investments or greenwashing. Given the diversity of methodologies used for sustainability ratings, greater transparency on methodological choices and on the origin of data is crucial. Such transparency would allow users to ensure that they share a common understanding of ESG performance, and allow for better comparability between providers.

In recent years, Europe has seen greater consolidation in the market for sustainability-related services. This could lead to higher risks of dependence upon a limited number of providers, higher prices and to the emergence of new potential conflicts of interest.

Therefore, via this joint position paper, the AMF and the AFM propose the creation of a European regulation that would entrust the supervision of market players operating in the European Union on a professional and commercial basis to ESMA. This regulation would introduce tranparency requirements on methodologies and on identification and management of conflicts of interest. It would provide for organisational and operational requirements to ensure robust processes for data collection and processing. This framework is seen as a starting point, which should be reassessed periodically, taking into account future market developments.

Laura van Geest, Chair of the Dutch Authority Financial markets: “We believe providers of sustainablity-related services play a crucial role for investors in the market for sustainable finance. Many investors depend on them in their investment decisions. Introducing minimum transparency and organisational requirements should greatly benefit this key part of the sustainable finance ecosystem. This joint AMF/AFM position paper aims at contributing to the debate on what regulation of ESG rating and data services providers should look like. We would like to invite regulators, market players and other stakeholders to add their perspectives to this debate.”

Robert Ophèle, Chair of the Autorité des marches financiers: “The sustainable investment market is growing rapidly, but its credibility depends largely on the quality and reliability of the ESG information used. It is with this objective in mind and to ensure investor confidence that we wish to propose with the AFM a European regulatory framework for ESG data and service providers. The construction of such a regulation should be put on the agenda of the renewed sustainable finance strategy and conducted collectively.”