Information Intermediaries and Sustainability: ESG ratings and benchmarks in the European Union

The relatively new world of ESG indicators displays many similarities with the original markets for ratings and benchmarks but it also has some distinguishing features. This paper explores to what extent the regulatory strategies that were developed in ‘traditional’ financial law to support confidence in ratings and benchmarks can be exported to the ‘new’ world of ESG finance. It concludes that policymakers should be cautious when transposing rules from the ‘old world’ to the ‘new’ one.

This is especially the case with ESG ratings, for which credit ratings are the immediate reference for regulation with the common label of ‘rating’ being rather misleading and leading to the risk of an anchoring effect in the design of new rules. First, due to their multivariate nature, the assessments underlying ESG ratings are often more subjective than those supporting traditional indicators. Second, there seems to be a higher risk of regulatory failures connected to the authorisation and registration labels in the new world of sustainability.

The paper therefore suggests that the legal framework for financial analysts could be a more suitable model to consider at this stage and that the initial approach to ESG ratings should mostly focus on disclosure.

Matteo Gargantini is Assistant Professor of Business Law at the University of Genoa; Michele Siri is Professor of Business Law at the University of Genova, Director of the Genoa Centre for Law and Finance, and Member of the Sustainable Finance Network at the University of Zurich.

This paper has received the Best Paper Award at the 2022 Annual Conference of the European Capital Markets Institute (ECMI). Financial support from ECMI is gratefully acknowledged.