EU Tightens Grip on ESG: Green Light for New Regulation on Rating Activities

ESG ratings offer an assessment of a company or financial instrument's sustainability profile, considering both its exposure to sustainability risks and its impact on society and the environment. To enhance investor confidence in sustainable products, the European Council and European Parliament have reached a provisional agreement a new regulation for ESG rating activities.

The new rules requires ESG rating providers to be authorised and supervised by the European Securities and Markets Authority (ESMA). The ESG rating providers will also need to comply with transparency requirements with regard to their methodology and sources of information.

Key elements of the agreement:

• Scope of application: territorial scope, “operating in the Union”.

• Clarification: ESG ratings encompass environmental, social, and governance factors, with the possibility for separate E, S, and G ratings.

• Authorization process:

  • EU-based providers: Authorized by ESMA.

  • Non-EU providers:

    • Endorsed by an authorized EU provider, or

    • Recognized based on a quantitative criterion, or

    • Included in the EU registry via an equivalence decision with their home country.

• Temporary registration: A lighter, optional registration is available for for small undertakings and groups providing ESG ratings for a three-year period.

• Conflict of interest prevention: Adherence to separation of business and activities is required for ESG rating providers.

See the recent press release and final compromise text of the Regulation.

We'd love to hear what you think of this update. Please share your comments or feedback, especially if you have any suggestions for improvement.