The European Council has adopted a new regulation on Environmental, Social, and Governance (ESG) rating activities designed to enhance transparency, consistency, and investor confidence in sustainable financial products.
Key Objectives:
- Improve the reliability and comparability of ESG ratings
- Strengthen investor trust in sustainable investment products
- Establish clear regulatory oversight of ESG rating providers
Scope and Requirements:
ESG ratings assess a company’s or financial instrument’s sustainability profile by evaluating its environmental and societal impact and associated risks. The new regulation introduces comprehensive guidelines for ESG rating providers:
Regulatory Supervision:
- ESG rating providers within the EU must be authorized and supervised by the European Securities and Markets Authority (ESMA)
- Providers must comply with transparent methodology and information source requirements
External ESG rating providers operating in the EU must:
- Obtain endorsement from an EU-authorized ESG rating provider
- Be recognized based on quantitative criteria
- Be included in the EU registry through an equivalence decision
Key Regulatory Principles:
- Mandatory transparency in rating methodologies
- Strict separation of business activities to prevent conflicts of interest
- Enhanced operational integrity and reliability of ratings
Implementation Timeline:
- Regulation will be published in the EU’s Official Journal
- Enters into force 20 days after publication
- Starts applying 18 months after entry into force
The regulation stems from a proposal presented by the European Commission on 13 June 2023, following negotiations with the European Parliament.
Primary Goal: Boost investor confidence by creating a standardized, reliable framework for evaluating the sustainability performance of companies and financial instruments.
