BaFin and BVI against expensive research
It's an unusual alliance that has emerged in recent weeks concerning ESG ratings. On one side, there's the German financial supervisory authority BaFin, and on the other side, the German fund association BVI, which lobbies on behalf of its members in Berlin and Brussels.
The topic has been on the agenda for months, focusing on regulating this area and establishing some guidelines. Unlike credit ratings, there are hardly any specifications, and ESG rating results for the same company can vary significantly.
New EU regulation on the way
New EU regulation is on the way. Brussels recently reached an agreement on a regulation for ESG ratings, which still needs confirmation. Against this backdrop, the publications by BaFin and BVI are noteworthy. It started with a study by the supervisory authority, which concludes in the headline: „Data and ratings on ESG are expensive and in need of improvement.“ The high costs of ESG analyses have long been suspected. BaFin cites an average budget for procuring ESG data per fiscal year of 48,000 euros for 2024.
BaFin did not arrive at this result by collecting costs from providers and comparing them with services, but rather conducted a survey among 30 German asset management companies, which are clients of ESG rating agencies.
Research from MSCI, ISS, and others
The results are not surprising. Asset management companies consider research by MSCI, ISS, and others to be too expensive, incomplete, and of poor quality. This is a broadside against the green research industry, which BaFin echoes in its study. Among the causes of the high costs for ESG data and ratings, the asset managers cite „the concentration on a small number of data providers and their dominant market position, allowing them to charge high prices for their ESG data and ratings", writes BaFin, presenting the responses without comment. The survey results also indicate a steady increase in the budget for ESG data. However, this could have different causes and is not proof that a service is too expensive.
For the German asset management industry, BaFin's study is welcome news. In a report on the waning interest in green funds, BVI refers to the study. Less volume and more costs – clearly a problem. BVI gladly seizes on BaFin's „market study", which highlights the imbalance between the costs and the performance of external ESG data providers.
Lack of cost transparency
This makes it easier to argue that while the agreement on the ESG rating regulation is a significant step forward, deficiencies in ESG data still exist. Therefore, the costs of EU regulation pose a major challenge, especially for smaller companies.
Providers remain opaque
It is difficult to determine what reasonable costs for research and ratings services are. No provider reveals their hand in this regard, and ESG rating providers also seek to maintain this opacity. In the context of the discussion about regulating ESG data and ratings, the providers say there simply needs to be more competition, which would solve the problem of allegedly high prices. This simplifies matters for ESG rating providers. The rules proposed by Brussels do not include explicit cost guidelines, which undoubtedly pleases the rating industry.
A bit more transparency would be desirable, even beyond what has been agreed upon in Brussels. Nonetheless, there's a bit of a taste to it when BaFin and BVI play this game together. It's quite transparent and may not ultimately serve the cause.
