ESG Regulations Moving in Right Direction | ETF Trends

One of the primary hurdles to broader adoption of environmental, social and governance (ESG) investing principles and the related funds has been long-lacking clarity and regulatory framework covering ESG ratings and regulations.

Give the Europe Union (EU) credit because that collection of countries is working to change the aforementioned issues. The European Parliament and Council announced Tuesday a tentative agreement to regulate providers of ESG ratings. While more regulations are usually not viewed favorably by investors, the news could be beneficial to ESG investing’s long-term prospects.

It could also benefit exchange traded funds such as the Invesco ESG Nasdaq 100 ETF (QQMG) and the Invesco ESG Nasdaq Next Gen 100 ETF (QQJG). The news out of Europe emerges against the backdrop of sustainable funds having suffered outflows. More professional money managers demand more clarity on exactly how ESG ratings are produced.

ESG Regulations Could Be Positives

It remains to be seen if the ESG regulatory efforts being hatched in Europe migrate to other markets. Still, some market observers believe the goings on across the Atlantic represent a solid starting point.

“The new agreement comes as pressure builds to regulate providers of ESG ratings and data, with demand for the services surging as investors increasingly integrate ESG considerations into the investment process, while the activities and businesses of the providers are generally not covered by markets and securities regulators,” reported Mark Segal for ESG Today.

Should comprehensive ESG regulations matriculate to the U.S., QQMG and QQJG could have a leg up on competing products. This is because the Invesco ETFs already adhere to straight-forward ESG ratings and scoring. Not only do QQMG and QQJG employ standard ESG tactics, such as avoiding stocks from the alcohol, fossil fuels, and gambling industries, the funds’ holdings also must meet standards set forth by the United Nations Global Compact principles.

That’s not say QQMG and QQJG are perfect from the perspectives of ratings and regulations. Still, the funds may be ahead of competitors. This is important at a time when murkiness is abound when it comes to generating ESG ratings. Those debates are among the reasons Europe is taking seriously efforts to clarify ESG to investors.

In Europe, “aspects of the new rules include a possibility for providers to offer separate environmental, social and governance ratings, but a requirement to detail the weightings of ‘E,’ ‘S,’ and ‘G’ factors if a single rating is provided, and a requirement for financial advisers that  disclose ESG ratings as part of their marketing communications to include information about the methodologies used for the ratings on their website,” added Segal in his reporting.

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