EU markets regulator the European Securities and Markets Authority (ESMA) announced today the publication of its draft Regulatory Technical Standards (RTS) under the EU’s ESG Rating Regulation, setting out its proposed rules for ESG ratings providers.
The publication follows the adoption by the European Commission in late 2024 of the ESG Rating Regulation, aimed at improving the reliability, transparency and comparability of ESG ratings and boosting investor confidence in sustainable financial products.
The process behind the regulation began in 2021, with the issuance of a letter by ESMA to the European Commission, advising that the current unregulated status of the ESG ratings sector and the resulting lack of transparency posed a potential risk to investors. In July 2021, the Commission launched a new Sustainable Finance Strategy, which included a pledge to take action to improve the reliability, comparability and transparency of ESG ratings, and subsequently asked ESMA to begin examining the market participants.
The regulation places ESG ratings providers under the authority of ESMA, with providers required to be authorized and supervised by the regulator, and to comply with transparency requirements into areas including methodologies used for ratings and sources of information.
The new proposed rules focus on a few key areas of compliance for providers, including the information required to be provided when applying for authorization and recognition as an ESG ratings provider, safeguards to be put in place to mitigate conflicts of interest, and information required to be disclosed to the public, issuers, and users of ESG ratings.
While the EU Commission’s initial proposed regulation required a separation of certain business activities from ESG ratings, with ratings providers not allowed to provide other services such as consulting activities to investors, issuance of credit ratings, and some other investment services, the final regulation allowed providers to offer the services if measures are put in place to avoid potential conflicts of interest. ESMA’s proposed rules includes criteria that must be put in place for ESG ratings providers to offer the other services, with providers required to put in place separate organizational structures and working environments for employees providing ESG ratings and those providing the other services, with the regulator stressing that its rules ensure that the separation is not just “superficial” or “mere legal formalities.”
Disclosure requirements for ESG ratings providers under the new rules would include the publication of the methodology, models and key rating assumptions used in deriving ESG ratings, as well as the sequence in which the information should be provided, in order to help users to identify where the information is located, aiding the regulation’s objective of increasing transparency and comparability.
Alongside the release of the draft RTS, ESMA launched a consultation on the proposed new rules, which will remain open until June 20, 2025. ESMA added that it expects to publish a final report and submit the draft RTS to the Commission for adoption in October 2025.
Click here to access the consultation paper on the new RTS.
