EU and UK introduce regulations for ESG ratings providers

November 28th, 2024

Both the EU and UK are set to implement regulations for ESG ratings providers aimed at improving transparency in methodology and strengthening investor confidence.

The Council of the European Union approved regulation requiring ESG rating providers within the EU to be authorised and monitored by the European Securities and Markets Authority.

These providers will also face transparency requirements, particularly regarding their methodologies and information sources.

Providers outside the EU must fulfil certain requirements, including obtaining endorsements from EU-authorised entities, meeting quantitative criteria for recognition or being listed in the EU registry through equivalence decisions.

The regulation also mandates the separation of business operations and rating activities in order to avoid conflicts of interest.

The regulation will be published in the EU’s Official Journal and enter into force 20 days later, with its provisions applying 18 months after that.

Meanwhile, the UK will introduce similar rules, which will cover all ESG ratings likely to influence investment decisions on specialised financial products.

This will include ratings from both UK-based and overseas providers when made available to UK users through business relationships.

The government specified that ESG ratings will be defined as assessments that include opinions or scores on one or more ESG factors. This definition applies regardless of whether or not the product is explicitly marketed as an ESG rating.

The regulation aligns with the 2021 recommendations of the International Organization of Securities Commissions, which emphasised improving the reliability, comparability and interpretability of ESG ratings as well as ensuring greater transparency in methodologies.

The move follows a recent consultation on the topic by the UK government which found that 95% of respondents supported the introduction of regulation for ESG ratings providers.

Tulip Siddiq, economic secretary to the treasury and city minister, said: “Bringing ESG ratings providers into regulation will boost investor confidence, reduce greenwashing, and address the lack of transparency highlighted in responses to the government’s consultation.”

Minerva’s blog focuses on the latest developments in ESG investing and stewardship. Minerva is a global provider of sustainable stewardship solutions with over 25 years of expertise. Minerva empowers investors by providing essential tools, including ESG research and data, enabling them to navigate the intricate landscape of stewardship and proxy voting, whilst ensuring their decisions are well-informed and aligned with sustainable principles.

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