EU member states and the European Parliament have reached a deal on the bloc’s first set of regulations on ESG rating activities, as reported by Reuters on February 6. Under the rules, ESG rating providers operating in the EU will be authorized and supervised by the European Securities and Markets Authority (ESMA), while non-EU raters need endorsement by an EU-authorized ESG rating provider. The regulations also clarify that ESG ratings encompass environmental, social, and human rights or governance factors. This means that raters will likely need to provide separate scores for an entity’s environmental, social, and governance profile, instead of rating all three factors with a single score. However, if raters provide a single figure, they will have to be explicit about how they weigh E, S, and G, according to a European Council statement.

Initially proposed by the European Commission in June 2023, the ESG rating regulations may become effective sometime during 2025. These rules aim to strengthen the reliability and comparability of ESG ratings by enhancing transparency and integrity in the operations of ESG ratings providers and preventing potential conflicts of interest. In addition, they are designed to encourage more ratings that cover “double materiality”, meaning a dual impact on both the company and the environment. Specifically, the rules stipulated that rating agencies will have to explicitly disclose whether their ratings cover how a company’s operations affect the environment or social factors such as human rights, instead of just focusing on the impact of ESG on a company’s financial performance.

Sources:

https://www.reuters.com/sustainability/eu-agrees-its-first-ever-rules-esg-raters-sector-shake-up-2024-02-06/

https://www.consilium.europa.eu/en/press/press-releases/2024/02/05/environmental-social-and-governance-esg-ratings-council-and-parliament-reach-agreement/

https://www.bloomberg.com/news/articles/2024-02-06/eu-agreement-on-esg-ratings-seen-as-world-s-toughest-to-date