2023/0177/COD: Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities

On June 14, 2023, the EU Commission published a proposed new regulation with respect to ESG rating providers in the Official Journal (OJ) of the EU. The draft is part of the Commission’s so-called Sustainable Finance package which will implement far-reaching measures to improve and strengthen the foundations of the EU sustainable finance framework (please see EventID 21535 in this context for a detailed description of the package). The proposed new regulation primarily seeks to regulate ESG rating providers and their operations, including their methods for deriving ESG ratings and the data sources they rely on, in an effort to ensure that providers are free of conflicts of interest, provide reliable, verifiable, and honest ESG ratings, and designate those firms as best performing firms that truly deserve high ESG ratings.
In detail, the draft
(1) would establish a new supervisory regime for ESG rating providers, in which the European Supervisory and Markets Authority (ESMA) would be responsible for authorizing and supervising such providers. ESMA would have the authority to withhold authorization from market participants who fail to meet the criteria outlined in the regulation. Once authorized, ESMA would supervise ESG data and rating providers and would have the power to request necessary information and conduct on-site inspections. Non-compliance could result in penalties including the withdrawal of authorization. In this context, ESMA would also be responsible for the creation and maintenance of a new EU register of ESG rating providers, including third-country providers.
Speaking about third-country providers, the new regulation would stipulate that such rating providers may endorse ratings provided outside the EU so long as they adhere to the International Organization of Securities Commissions (IOSCO) recommendations for ESG Ratings and Data Products Providers.
(2) would require the publication of certain information by ESG rating providers on the upcoming new European Single Access Point (ESAP) from January 2028 on. Thereafter, ESG rating providers would have to submit in machine-readable format information as regards the methodologies, models, and key rating assumptions they use in their ESG rating activities and information on rating complaints, besides general data such as the name of the entity, its LEI, or its size.
(3) would define overall governance requirements of ESG rating providers, including
– the need to develop policies with respect to the creation, oversight, and review of ESG ratings;
– the need to develop policies and procedures for the handling of conflicts of interest particularly with respect to analysts involved in ESG ratings; and
– the need to develop and maintain a system for complaints management.
(4) would set out a number of additional operational and organizational requirements with respect to ESG rating providers, including restrictions as to the types of activities they may perform along side their rating activities, the disclosures they shall make to the public, and the criteria they shall apply in their rating methodologies. Specifically, ESG rating providers would be prohibited to offer services such as consulting, investment, auditing, banking, credit rating, insurance and reinsurance to prevent conflicts of interest. Additionally, they would be required to disclose information on the methodologies, models, and key rating assumptions they use in their ESG rating activities. ESMA would be tasked with specifying the corresponding regulatory technical standards. Finally, ESG ratings would have to be „rigorous, systematic, objective and capable of validation“ and would have to be reviewed at least once a year by the rating provider.
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As the above paragraph only briefly describes the key requirements set out in the draft, please review the original legal document for more detailed, comprehensive information.