On 27 June 2022, the European Securities and Markets Authority (ESMA) published a letter it had sent to the European Commission setting out its findings from its call for evidence to gather information on the market structure for ESG rating providers in the EU.

In the letter the ESMA provides a brief introduction to the broader context in which its call for evidence was launched and the key objectives that guided its development. The ESMA then sets out its key findings, both overall, and for the different categories of respondents.

Key findings include:

  • The structure of the ESG rating provider market shows that there is a small number of very large non-EU providers, and a large number of significantly smaller EU entities. While the legal entities of respondents are spread out across almost half of the EU Member States, a large number of these are clustered in a small number of Member States.
  • Users of ESG ratings are typically contracting for these products on an investor-pays basis from several providers simultaneously. Their reasons for selecting several providers are to increase coverage, either by asset class or geographically, or in order to receive ESG assessments that are different in nature. The most common shortcomings identified by users were a lack of coverage of a specific industry or a type of entity, insufficient granularity of data, and a lack of transparency around methodologies used by ESG rating providers. However, the provision of ESG ratings on an issuer-pays basis was also evidenced and more prevalent than anticipated; and
  • Entities covered by ESG ratings dedicate at least some level of resourcing to their interactions with ESG rating providers, although the amount largely depends on the size of the rated entity itself. Most respondents highlighted some degree of shortcoming in their interactions with the rating providers, most notably on the level of transparency as to the basis for the rating, the timing of feedback or the correction of errors.

Based on the feedback to its call for evidence the ESMA concludes that the market for ESG rating providers in the EU is an immature but growing market which has seen the emergence of a small number of large non-EU headquartered providers. In the ESMA’s view the market bears some resemblance to the EU market for credit ratings. Similar to that market, there are a large number of smaller more specialised EU entities co-existing with larger non-EU entities who provide a more comprehensive suite of services.