ESG rating providers face EU regulation

June 15th, 2023

The European Commission is introducing new rules for ESG rating providers as part of a package of regulations to extend its sustainable finance framework.

In a bid to standardise ESG ratings, EU providers would need to be authorised and supervised by ESMA under the new requirements.

The regulations will also introduce new organisational principles and clear rules on the prevention of conflicts of interest to avoid greenwashing.

The Commission emphasised that many investors don’t trust current ESG ratings due to a lack of transparency, with the new rules outlining clearer methodologies and data sources to help them make an informed decision.

Commissioner Mairead McGuinness said: “At the moment, [ESG ratings are] completely unregulated. And therefore if it's unregulated, it's very difficult to compare information between these rating agencies, and it's difficult then to interpret what they mean.”

She added: “We don't have clarity on how these ratings are reached or what they measure and there seems indeed to be issues around conflict of interest by ESG rating providers, so our proposal today is about making ESG ratings transparent, comparable and reliable.”

The new regulations also include a new set of taxonomy criteria for economic activities making a substantial contribution to one or more of the following; transition to a circular economy; pollution prevention and control; protection and restoration of biodiversity and ecosystems; sustainable use and protection of water and marine resources.

The package also incorporates new initiatives to improve the usability of the rules and give guidance to facilitate transition finance.

The regulations follow a similar move in the UK in December when the government moved to bring ESG rating providers under the remit of the FCA to improve transparency.

The regulation comes following the European Parliament’s approval of The EU Corporate Sustainability Due Diligence Directive earlier this month, and after the EU voted to support a proposed ban on environmental claims that are based solely on carbon offsetting schemes in May.