The European Council has adopted a regulation to standardise environmental, social, and governance (ESG) rating activities across the EU. The new rules are designed to enhance consistency, transparency, and comparability, aiming to increase investor confidence in sustainable financial products.
ESG ratings evaluate a company’s or financial instrument’s sustainability profile by analysing its societal and environmental impact, along with its exposure to sustainability-related risks. These ratings significantly influence capital market operations and bolster trust in sustainable investments.
To improve reliability and comparability, the regulation mandates greater transparency and integrity in the operations of ESG rating providers while addressing potential conflicts of interest. ESG rating providers within the EU will now require authorisation and oversight by the European Securities and Markets Authority (ESMA). They must adhere to transparency standards, particularly concerning their methodologies and information sources.
Providers based outside the EU intending to operate within the bloc will need either an endorsement from an EU-authorised ESG rating provider, recognition through quantitative criteria, or inclusion in the EU’s ESG rating registry following an equivalence decision. The regulation also introduces a principle of separating business lines to prevent conflicts of interest.
The regulation will be published in the EU’s Official Journal and come into effect 20 days later. Its provisions will apply 18 months after that.
This development follows the European Commission’s proposal on 13 June 2023. The regulation’s adoption by the Council comes after an agreement with the European Parliament at the first reading under the ordinary legislative procedure.