Environmental, social and governance (ESG) rating providers in the European Union will need authorisation from the market regulator, the European Securities and Markets Authority, the European Council on 19 November 2024. The council also adopted new regulations aimed at improving the consistency, transparency and comparability of ESG rating activities across the EU. These rules are designed to enhance the reliability of ESG ratings, which assess a company’s or financial instrument’s sustainability profile, and to boost investor confidence in sustainable financial products.
According to the council, ESG ratings have become increasingly influential in capital markets, helping investors evaluate the sustainability impact of their investments and assess exposure to sustainability-related risks. The new regulation seeks to address concerns over transparency and ensure that ESG ratings are more reliable and reflective of actual sustainability performance.
Under the new rules, ESG rating providers established within the EU will be required to obtain authorisation and be supervised by Esma, with a particular focus on preventing conflicts of interest. Providers will also need to adhere to strict transparency requirements, especially regarding their rating methodologies and sources of information.
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For ESG rating providers based outside the EU, the regulation introduces new requirements to operate within the union. Non-EU providers will need to either obtain an endorsement of their ESG ratings from an EU-authorised provider, achieve recognition through a quantitative criterion or be included in the EU registry of ESG rating providers based on an equivalence decision.
A key aspect of the regulation is the separation of business activities to prevent conflicts of interest, ensuring that ESG ratings are produced in an independent and objective manner.
The regulation will be officially published in the EU’s official journal, entering into force 20 days later. However, it will only start applying 18 months after its entry into force, providing time for ESG rating providers to comply with the new requirements.