EC to regulate ESG ratings providers

The European Commission has tabled a new package of measures that it says will build on and strengthen the foundations of the EU sustainable finance framework. The proposals include regulation of ESG ratings service providers to try to bring more transparency and consistency to this critical element of the package.

The commission said that many companies and investors have already embarked on their sustainability journey, as the growing size of sustainable investment testifies. But it added that companies and investors are also facing challenges in this transition, especially when it comes to complying with new disclosure and reporting requirements.

The commission said the aim of the new package of measures is designed to ensure that the EU sustainable finance framework continues to support companies and the financial sector, while encouraging the private funding of transition projects and technologies.

A key part of the package is the approval in principle of a new set of EU Taxonomy criteria for economic activities that the commission said would offer a “substantial contribution” to one or more of the non-climate environmental objectives, namely:

• Sustainable use and protection of water and marine resources;
• Transition to a circular economy;
• Pollution prevention and control; and
• Protection and restoration of biodiversity and ecosystems.

To complement this, the commission has adopted targeted amendments to the EU Taxonomy Climate Delegated Act, which expand on economic activities contributing to climate change mitigation and adaptation not included so far – in particular in the manufacturing and transport sectors.

“The inclusion of more economic activities covering all six environmental objectives, and consequently more economic sectors and companies, will increase the usability and the potential of the EU Taxonomy in scaling up sustainable investments in the EU,” it said.

The next big move is the proposal for a regulation to govern ESG ratings providers.

“ESG ratings play an important role in the EU sustainable finance market as they provide information to investors and financial institutions regarding, for example, investment strategies and risk management on ESG factors,” it said.

“Today, the ESG ratings market currently suffers from a lack of transparency and the commission is proposing a regulation to improve the reliability and transparency of ESG ratings activities. New organisational principles and clear rules on the prevention of conflicts of interest will increase the integrity of the operations of ESG rating providers,” added the commission.

It said that the new rules will enable investors to make better-informed decisions regarding sustainable investments. The proposal will also require that ESG-rating providers offering services to investors and companies in the EU be authorised and supervised by the European Securities and Markets Authority (ESMA). “This will also ensure the quality and reliability of their services to protect investors and ensure market integrity,” said the commission.

The EU Taxonomy Delegated Acts are approved in principle and once all EU official languages are made available, they will be adopted and transmitted to the European Parliament and the Council for their scrutiny (four-month period, extendable once by two additional months). They are expected to apply as of January 2024.

Regarding the proposal for a regulation of ESG ratings providers, the commission will now engage in discussions with the European Parliament and council.

This package follows the launch on Friday 9 June of a four-week feedback period on the first set of sustainability reporting standards for companies.

“Mandatory reporting standards will ensure transparent and comparable sustainability information. The Commission will consider the feedback received before finalising the standards as delegated acts and submitting them to the European Parliament and Council for scrutiny. Once adopted, these reporting standards will be used by companies subject to the Corporate Sustainability Reporting Directive (CSRD). This will mark another step forward in the transition to a sustainable EU economy,” said the commission.