On 5 February 2024, the European Parliament (the Parliament) and the Council of the European Union (the Council) reached a provisional agreement on the EU Commission's proposal from June 2023 for a regulation governing environmental, social, and governance (ESG) rating activities. This rating aims to offer an assessment of a company's or a financial instrument's sustainability profile, ultimately bolstering investor confidence in sustainable products. ESG ratings' new rules appear as a priority, as they will strengthen the reliability and comparability of ESG ratings and improve the transparency of the operation of ESG rating providers.
Specifically, the provisional agreement provides that ESG rating providers established in the EU will be authorised and supervised by the European Securities and Markets Authority (ESMA) regarding their methodology and sources of information. Conversely, third-country-based ESG rating providers seeking to operate within the EU will either need:
- to obtain an endorsement of their ESG ratings by an EU-authorised ESG rating provider;
- to be recognised based on quantitative criterion; or
- to be included in the EU registry of ESG rating providers based on an equivalence decision.
Furthermore, the agreement clarifies various aspects of the regulatory scope by defining circumstances and territorial boundaries and provides more detailed information on applicable exclusions. Additionally, the Council and Parliament offer further clarity on practical matters, such as the requirement for financial market participants or advisers disclosing ESG ratings in their marketing communications to include information about their methodologies on their websites, and the option to present separate E, S, and G ratings.
Small undertakings and groups providing ESG ratings would also be able to benefit from a lighter, temporary, and optional registration regime introduced by the Council and the Parliament. This temporary regime encompasses general organisational principles and governance requirements, overseen by ESMA. Such small ESG ratings providers may also be exempted from certain requirements by ESMA.
The agreement also introduces the principle of separation of business and activities, and provides an exemption for ESG ratings providers not to set up a separate legal entity for certain activities that are clearly separated, to the exclusion of providers carrying out consulting activities, audit activities, and credit rating activities.
The provisional political agreement is subject to approval by the Council and Parliament and subsequent formal adoption. The new rules will come into effect 18 months after their entry into force.
