ESG Ratings Regulation: "green light" from the Council

In our previous post, we described a political agreement reached by the Council and the European Parliament on the Regulation of the European Parliament and of the Council on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities, and amending Regulations (EU) 2019/2088 and (EU) 2023/2859 (the "ESG RatingsRegulation"). On 19 November 2024, the ESG Ratings Regulation was formally adopted by the Council (see press release). As a next step, it will be published in the Official Journal of the European Union. The ESG Ratings Regulation will enter into force 20 days after its publication and will be applicable 18 months after its entry into force. 

Highlights

The main highlights of the ESG Ratings Regulation are as follows:

• ESMA Authorisation and Supervision: ESG rating providers established in the EU will have to be authorised and supervised by the European Securities and Markets Authority (ESMA) to ensure that they comply with the ESG Ratings Regulation.
• Clear Rating Methodologies / Transparency: ESG rating providers will have to disclose how they evaluate ESG factors to make the evaluation process and the corresponding ratings more transparent.
• Prevention of Conflicts of Interest: ESG rating providers will be prohibited from offering ESG rating services alongside other types of services (e.g. consulting or credit rating) in order to prevent conflicts of interest.
• Transition Period for Smaller Providers: In order to make it easier for smaller rating providers to adapt to the new rules, they will be granted a three-year transition period with simpler registration requirements.

Why It Matters

The ESG Ratings Regulation aims to improve the transparency and integrity of the evaluation of ESG aspects related to financial instruments, and thus strengthen the reliability and comparability of ESG ratings. As such, it is a significant step towards building confidence in green investments.