Category Archives: Sustainability regulations

New EU rules on ESG ratings

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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.

Sources:

Press release

Legislative train

The U.S. Securities and Exchange Commission (SEC) adopted rules for climate-related disclosures

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After a two-year delay and intense political debates, the U.S. Securities and Exchange Commission (SEC) – Wall Street’s top regulator – has today adopted rules for climate-related disclosures by public companies and in public offerings.

The final rules reflect the Commission’s efforts to respond to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a company’s operations and how it manages those risks, while balancing concerns about mitigating the associated costs of the rules.

The final rules will, among other information, require a company to disclose:

⭕ Climate-related risks that have had or are reasonably likely to have a material impact on the company’s business strategy, results of operations, or financial condition – including the material impacts of such risks on the company’s strategy, business model, and outlook;

⭕ Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the company’s material climate-related risks;

⭕ Any processes the company has for identifying, assessing, and managing material climate-related risks and, if the company is managing those risks, whether and how any such processes are integrated into the company’s overall risk management system or processes;

⭕ For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions – including an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;

⭕ The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;

⭕ The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a company’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and

⭕ If the estimates and assumptions a company uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.

Source: SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors