Agencies that issue ESG ratings should have rules that crack down on "greenwashing", the head of the European Securities and Markets Authority (ESMA) said.
Steven Maijoor called for reliable ESG standards and their supervision and the need for measures across the whole of the investment chain saying: "The financial sector plays a pivotal role as a key transmission channel of the much-needed transformation towards a more sustainable economic system. As securities regulators this is a matter of high priority."
"Personally I believe that, where ESG ratings are used for investment purposes, ESG rating agencies should be regulated and supervised appropriately by public sector authorities," he told a conference in Dublin.
ESG rating agencies should be regulated and supervised appropriately by public sector authorities"
Financial firms need to be transparent on the ESG profile of the investments they make on behalf of clients, he added.
The European securities regulator will start to probe sustainable finance, looking for risks including greenwashing and climate risks, and may use stress tests in some market segments.
To ensure that ESG guidelines are followed by firms that operate under ESMA's jurisdiction, the regulator will analyse financial risks stemming from climate change, including potentially stress testing different market segments.
By inspecting issuers, investment funds, money management firms and retail investors, ESMA seeks to mitigate risks stemming from greenwashing and the misrepresentation of strategies as sustainable investments, and to foster reliable reporting of non-financial information from issuers.
Greenwashing refers to products that wrongly claim to be sustainable.