We could certainly have done without it. Europe’s summer is a stark reminder of the link between ESG — environmental, social and governance factors — and financial risk. Heatwaves, wildfires and water stress are undeniably having a tangible impact on assets, value chains, insurability, credit and growth prospects.
Financial institutions are not immune. Banks, driven by supervisory expectations, are integrating ESG data into credit risk analysis, covenants and prudential alignment. Investors see it as both a risk management tool and a lever for capital allocation. Central banks, meanwhile, continue to identify sustainability-related issues as a potential source of systemic risk for financial stability.
Despite controversies and headwinds, sustainable finance continues to gain momentum. It is however entering a new phase.
The ESG data and ratings market continues to grow, fuelled by European demand. The debates surrounding the Omnibus package have made one thing clear: easing reporting requirements does not remove its fundamental need. Investors and regulators alike need more than ever available, reliable and comparable data to measure and manage non-financial risks.
The real question is no longer whether sustainable finance will fall back, but how can it become more mature: less activist in nature, more embedded in financial decision-making; less generic, more operational; less driven by unsubstantiated promises than by demonstrable usefulness. For European ESG rating agencies, a new chapter is beginning, shaped by four hard to reconcile demands.
First requirement: easier to use solutions with strengthened analysis.
Financial institutions want solutions that are clear and easy to integrate. But simplicity does not mean oversimplification. The issues themselves are becoming more complex: climate, biodiversity, just transition and financial valuation need to be better connected. Investors, insurers and bankers expect granular data, robust methodologies and comparable outputs that can be used directly in decision-making.
Second requirement: global coverage without giving up on European’s view of the world.
European portfolios are global, and so are their sustainability risks. Extending the geographic scope of assets covered by ESG ratings to a global universe has become essential.
The cost of providing this extensive coverage favours large global players. Yet ESG data and ratings cannot be treated as mere commodities. They sit at the heart of Europe’s financial system and economy and are therefore key strategic assets. They shape capital allocation, risk assessment and, ultimately, are an integral part of Europe’s competitiveness. The issue of sovereignty around ESG data and ratings is no longer an abstract concept. It is a real requirement and European investors are paying closer attention to it.
Third requirement: a broader spectrum of analysis with strengthened comparability.
Initially solely focused on listed equities, sustainable finance now covers asset classes as diverse as sovereign debt, private credit, infrastructure, real estate and private equity. Each asset class requires its own metrics. Hence expert and siloed solutions have reached their limits. Investors need analytical tools that can speak the languages of different asset classes while maintaining a common grammar.
Fourth requirement: raise quality in a market under increasing price pressure.
The market expects broader coverage, reliable data, robust processes and stronger quality controls. At the same time, margins are tightening and budgets are being rationalised. The market is asking for more and better at a lower cost: this is both an industrial and an analytical challenge.
Against this backdrop, strategic transformations are crucial to reshape ESG rating agencies to this new reality.
The consolidation in the industry currently underway is ultimately about building an integrated response: global coverage, robust methodologies, combined financial and non-financial expertise, technology at scale, global distribution and integration of artificial intelligence.
Sustainable finance in Europe does not need less ambition.
It needs solutions that are more intelligible, reliable, sovereign and operational. Only then, can it continue to play its role: directing capital towards a more resilient economy, better prepared for the risks ahead — some of which are already with us.
Carol Sirou
Chief Executive Officer, EthiFinance
