On 24 April the European Parliament adopted new rules – with 464 votes in favour, 115 against and 13 abstentions – that will regulate the ecosystem of ESG rating activities to allow investors to make more considered investments and fight greenwashing.
Environmental, Social and Governance (ESG) ratings have an increasingly important impact on the operation of capital markets and on investor confidence in sustainable products.
The market of ESG ratings is expected to continue to grow substantially in the coming years.
The new rules aim to introduce a common regulatory approach to enhance the integrity, transparency, responsibility, good governance, and independence of ESG rating activities, contributing to the transparency and quality of ESG ratings.
As a rule, separate E, S and G ratings shall be provided rather than a single ESG metric that aggregates E, S and G factors.
⭕ If an ESG rating covers the E factor, information will also need to be provided on whether that rating takes into account the alignment with the Paris Agreement and any other relevant international agreements.
⭕ If an ESG rating covers the S and G factors, information must be given on whether that rating takes into account any relevant international agreements.
This breakdown should allow investors to better target their investment into one of the three areas, and have a clearer idea of the rated entity’s credentials.
ESMA will ensure the role to authorise and supervise ESG rating providers.
To ensure that ESMA is able to perform those supervisory tasks, ESMA should be able to impose penalties or periodic penalty payments.
ESMA shall publish annually on its website a list of ESG rating providers listed in the register, indicating their total market share in the Union.
The publication shall take stock of the market structure, including concentration levels and the diversity of ESG rating providers.
The current ESG rating market suffers from deficiencies and is not functioning properly, mainly due to
⭕ the lack of transparency on the characteristics of ESG ratings, their methodologies and their data sources and
⭕ the lack of clarity on how ESG rating providers operate.
Confidence in ratings is being undermined and they do not sufficiently enable users, investors and rated entities to take informed decisions as regards ESG-related risks, impacts and opportunities.
Once the new text is formally approved by Council, the new regulation enters into force on the 20th day following that of its publication in the Official Journal of the European Union.
It shall apply from 18 months after the entry into force.
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