Key takeaways
The latest update from the EU Council, passes Legislation to Regulate ESG Ratings
A little over a week ago, the European Council announced an exciting update. They have adopted new rules to regulate ESG rating providers. The new rules aim at making rating activities in the EU more consistent, transparent and comparable in order to boost investors’ confidence in sustainable financial products.
What does this mean for ESG rating providers?
Under this new legislation, ESG ratings providers will now fall under the oversight of the European Securities and Markets Authority (ESMA). Providers will need to obtain authorization and be monitored by the regulator, complying with transparency standards and transparency requirements, as a minimum disclosing "the methodology, models, and key rating assumptions.
The new framework also mandates that ESG rating providers based outside the European Union must meet specific conditions to operate within the bloc. They can either secure an endorsement of their ratings from an EU-authorized ESG provider, gain recognition through quantitative criteria, or be listed in the EU registry of ESG rating providers following an equivalence agreement between the authorities in their home country and ESMA.
Rating providers must ensure their various business activities are kept distinct; however, regulators have allowed some flexibility. Separate legal entities are not required if providers can demonstrate that activities are effectively segregated and free from conflicts of interest.
Providers are also required to issue separate ratings for Environmental (E), Social (S), and Governance (G) factors. If a unified ESG rating is offered, they must clearly disclose the score and weighting assigned to each individual dimension.
What are the next steps?
With the legislative process finalized by the Council and Parliament, the rules will be published in the EU’s Official Journal. They will take effect 20 days after publication and will be enforceable 18 months thereafter (in 2026).
