Environmental, social and governance (ESG) ratings: Council greenlights new regulation
The Council today adopted a new regulation on environmental, social and governance (ESG) rating activities. The new rules aim at making rating activities in the EU more consistent, transparent and comparable in order to boost investors’ confidence in sustainable financial products.
ESG ratings provide an opinion of a company’s or a financial instrument’s sustainability profile, by assessing its impact on society and the environment and its exposure to risks associated with sustainability issues.
ESG ratings have an increasingly important impact on the operation of capital markets and on investor trust in sustainable investment products.
The new rules aim to strengthen the reliability and comparability of ESG ratings by improving the transparency and integrity of the operations that ESG ratings providers carry out and by preventing potential conflicts of interest.
In particular, ESG rating providers established in the Union will need to be authorised and supervised by the European Securities and Markets Authority (ESMA). They will have to comply with transparency requirements, in particular with regard to their methodology and sources of information. ESG rating providers established outside the Union that wish to operate in the Union, will need to obtain an endorsement of their ESG ratings by an EU authorised ESG rating provider, a recognition based on a quantitative criterion, or be included in the EU registry of ESG rating providers on the basis of an equivalence decision.
The regulation introduces as a principle a separation of business and activities in order to prevent conflicts of interest.
Next steps
The regulation will be published in the EU’s Official Journal and enter into force 20 days later. The regulation will start applying 18 months after its entry into force.
Background
On 13 June 2023, the Commission presented a proposal for a regulation on ESG rating activities. Adoption by the Council follows an agreement reached with the European Parliament at first reading under the ordinary legislative procedure.
