The European Council has reached an agreement on a proposal to regulate ESG rating providers, placing them under the supervision of the European Securities and Markets Authority (ESMA), as reported by ESG Today on December 20. Under the proposed rules, ESG rating providers operating in the EU will be subject to authorization and supervision by the ESMA and need to comply with transparency requirements, especially regarding their methodologies and information sources. For providers established outside the bloc, they would need to obtain an equivalence decision, an endorsement of their ESG ratings, or a recognition. Additionally, the Council has introduced a temporary and optional three-year registration regime for smaller ESG rating providers. Those opting for this regime will be exempted from ESMA supervisory fees and face lighter compliance requirements.

The proposal on ESG ratings was initially released by the European Commission in June 2023. It demands that ESG rating providers ensure quality and reliability through the adoption of rigorous and objective methodologies and improved transparency in methodologies, models, and key rating assumptions. The proposal responds to concerns raised by the ESMA, which cautioned the European Commission that the current lack of regulation and transparency in the ESG rating sector poses a potential risk to investors. Earlier this month, the Monetary Authority of Singapore (MAS) also issued a Code of Conduct for providers of ESG rating and data products, establishing voluntary industry principles on transparency in methodologies and data sources, governance, and management of conflicts of interest.

Sources:

https://www.esgtoday.com/eu-council-agrees-on-proposal-to-regulate-esg-ratings-providers/

https://www.consilium.europa.eu/en/press/press-releases/2023/12/20/sustainable-finance-council-agrees-negotiating-mandate-on-esg-ratings/

MAS Proposes Code of Conduct for Providers of ESG Ratings and ESG Data Products

https://www.mas.gov.sg/news/media-releases/2023/mas-publishes-code-of-conduct-for-providers-of-esg-rating-and-data-products