Regulating EU and non-EU ESG rating providers: Ready for the new EU rules?

On 22 February 2024, the EU achieved a significant milestone when MEPs in the European Parliament's Economic Affairs Committee (ECON) approved the final agreement on the Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities, also known as the “ESG Rating Provider Regulation”. By enhancing the reliability of ESG ratings within the EU, this regulation marks a significant step towards achieving the EU's sustainable finance objectives outlined in its Action Plan in 2018.

The draft Regulation seeks to address longstanding issues of lack of completeness, standardisation, methodological clarity, and integrity by introducing prudential regulation for ESG rating providers. By focusing on transparency and the prevention of conflict of interest, not on the substance and methodology of the ratings themselves, it aims to enhance reliability in ESG ratings and channel capital towards sustainable investments.

With the adoption of the Regulation, the EU reaffirms its position as a global pioneer in sustainable finance, setting a precedent for other jurisdictions by covering both EU and non-EU firms with activities in the single market. That said, while many industry stakeholders welcome the clarity and certainty provided by the new regime, concerns have been raised regarding the potential stifling effect on smaller ESG rating providers. 

With the final publication of the new rules in the Official Journal of the European Union expected in summer 2024, the Regulation signals the EU's commitment to completing the current deliverables designed by the European Commission on the eve of its new 5-year term in Brussels. Once published, the Regulation will come into force 18 months thereafter.

A comprehensive briefing is provided here.