EU agrees new rules for ESG ratings

On 5 February 2023, EU co-legislators reached a political agreement for regulating ESG rating providers to improve the governance and transparency of ESG ratings.

Finance Watch, the pan-European NGO advocating to make finance serve society, welcomes the political agreement as the expected rules will give more confidence in ESG ratings and improve the tools available to sustainable investors. 

Co-legislators agreed to reinforce the transparency requirements of the Commission’s proposal and to disaggregate the environmental, social, and governance components of an ESG rating.

The text also introduces a series of provisions to prevent conflicts of interest such as the separation of ESG rating activities from consulting activities, audit activities, and credit rating activities. 

Vincent Vandeloise, Senior Research & Advocacy Officer at Finance Watch, said:

The proposed transparency rules will substantially improve how ESG ratings are interpreted. Providers will, among others, be required to disclose their methodologies, explain the materiality objectives of their ratings, and disaggregate environmental, social, and governance factors.

To further improve the comparability of information and prevent the disclosure of overly detailed documentation, ESMA may develop templates for rating providers to disclose the requested information. 

The financial sector will only benefit from a partial exemption. Despite the Council’s initial position to exclude all regulated financial services and products, asset managers will still need to respect some transparency rules when issuing ESG ratings on their financial products. This was done through amending the Sustainable Finance Disclosure Regulation (SFDR).

About Finance Watch

Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.

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