On the 5th of February 2024, the European Council and European Parliament reached a provisional political agreement on a proposal to regulate Environmental, Social and Governance (ESG) rating activities. The provisional agreement follows a Commission Proposal presented in June of 2023, which put forward a proposed regulation designed to promote quality and reliability among ESG Ratings Providers ('ERPs') and to boost investor confidence in ESG products.
ESG ratings generally provide a form of opinion on the exposure of a company or financial instrument to ESG factors as well as the related risks and their impact on the company and on society. ESG ratings have become a fundamental tool in ensuring transparency in the EU sustainable finance market and in establishing investor confidence in sustainable products, as they provide a critical source of information for investment strategies, risk management and disclosure obligations relevant to financial institutions and investors alike.
The provisionally agreed regulation establishes an authorisation and supervision framework for ERPs with the European Securities and Markets Authority ('ESMA') in terms of which ERPs would be required to comply with certain organisational, independence and transparency requirements. In particular, ERPs would be required to make certain disclosures (including certain website disclosures) on the methodologies, models and key rating assumptions used in their ESG rating activities.
It is pertinent to note that, under the proposed regulation ESMA, the Commission, as well as public authorities of Member States, should be precluded from interfering with the content of ESG ratings or their underlying methodologies.
Furthermore, the provisional rules outline certain circumstances under which ERPs should fall outside the scope of the regulation and also contemplate a light-touch, temporary regime for certain small ERPs.
Subject to limited exceptions, the provisionally agreed regulation requires ERPs to segregate, through the establishment of a separate legal entity, their ESG rating activities from other business, advisory or consulting activities.
The provisional political agreement is subject to final approval by the Council and the Parliament before going through the formal adoption procedure.
The ESG team at Camilleri Preziosi will continue monitoring further developments in this space. Contact us at esg@camilleripreziosi.com should you wish to discuss any of the content in this news alert or any other ESG matter.
You can view the official Council of the European Union Press Release here.
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