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ESMA Finds High Level of Divergence in Disclosure of ESG Factors in Credit Ratings

10 February 2022

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, published an article assessing the implementation of ESMA’s guidelines on the disclosure of environmental, social, and governance (ESG) factors in credit rating agencies (CRAs) press releases.

Whilst the overall level of disclosures has increased, there remains a high level of divergence across CRAs. This leaves scope for further improvement, with European regulators turning to natural language processing for data mining across press releases issued by Credit Rating Agencies (this may represent a future tool for risk-based supervision).

To accommodate growing investor interest in sustainable finance, CRAs have sought to become more transparent as to how ESG factors are integrated into their credit ratings driven by March 30, 2020, ESMA Guidelines for how and when CRAs’ considerations of ESG factors are disclosed in credit rating press releases. The Guidelines indicate that, where ESG factors have been key drivers behind a change to the credit rating or rating outlook, CRAs are expected to:

– identify the relevant factors

– elaborate on their materiality

– include a reference to where an explanation of how ESG factors are considered as part of the credit rating process can be found

As such, the ESMA Guidelines focused on improving how CRAs’ considerations relating to ESG factors are disclosed when such factors are a key underlying element of a credit rating action. However, the Guidelines neither mandate nor recommend that ESG factors be considered by CRAs in their creditworthiness assessments.

Whilst CRAs can have different methodological approaches and not all ESG factors are relevant in terms of the creditworthiness of an issuer or instrument, which is what a credit rating measures, it is unclear why some CRAs deem ESG factors to be relevant and report them in their press releases, while others do not yet do so. The implementation of the guidelines will continue to be monitored.

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