The EU is taking steps towards enhancing investor confidence in sustainable products with a new set of rules aimed at bolstering the reliability of ESG ratings.
These ratings, pivotal in assessing a company’s sustainability profile, are set to undergo a transformation under the EU Council’s latest agreement.
Key points from the Council’s agreement highlight a major regulatory shift. ESG rating providers will soon require authorisation and supervision by the European Securities and Markets Authority (ESMA). This move ensures greater transparency, particularly regarding their methodology and information sources. Furthermore, providers will be subject to measures designed to prevent and manage conflicts of interest.
The Council has also introduced notable changes to the initial proposal. Notably, the regulation’s scope now includes detailed exemptions and aligns with the corporate sustainable reporting directive, encompassing a broader range of factors like human rights. For ESG rating providers operating within the EU, compliance with certain requirements is mandatory, including ESMA authorisation or, for non-EU entities, an equivalence decision, endorsement, or recognition.
In an effort to support smaller market players, the Council has introduced a lighter, optional registration regime for small ESG rating providers. This regime, lasting three years, exempts participants from certain fees and allows them to adhere to general organisational and governance principles without the full burden of compliance.
Another significant aspect is the separation of business activities. The Council has permitted ESG rating providers to not have separate legal entities for certain activities, provided they ensure clear distinctions and measures to avoid conflicts of interest, particularly in consulting or audit activities.
The European Parliament’s agreement on its negotiating mandate, combined with the Council’s stance, sets the stage for interinstitutional negotiations slated to begin in January 2024. This development marks a pivotal moment in the EU’s commitment to sustainable finance, potentially revolutionising the landscape of ESG ratings and sustainable investing.
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