ECON adopts draft report on ESG Ratings Regulation

What's new?

On 4 December 2023, the European Parliament published a press release announcing that its Economic and Monetary Affairs Committee (ECON) had adopted a draft report on the European Commission's proposed Regulation on ESG Rating Activities.

MEPs made significant changes to the rules proposed by the European Commission, including:

• Breaking down the ESG rating into separate E, S and G factors

• Promoting the "double materiality" approach and

• Voting to adopt further initiatives to boost transparency and competition

Background

On 14 June 2023, the Commission published a package of measures intended to develop and strengthen the EU's sustainable finance framework, on which we reported here.

Amongst other measures, the Commission put forward a draft Regulation on ESG Rating Activities, with the aim of improving reliability, integrity and transparency of ESG ratings and enabling investors to make more informed decisions about sustainable investments.

What did MEPs vote for?

Concerned about the lack of transparency and competition in the ESG Ratings market, MEPs voted to:

• Separate ESG scores into separate E, S and G scores

  • Rating providers would now need to disclose whether the E, S and G factors are taken into account, or an aggregation thereof, and what weighting is given to each factor

  • In particular, the ESG rating providers would need to provide information on whether the rating considers the alignment with the Paris Agreement for the "E" factor, the ILO's conventions for the "S" factor, and the alignment with international standards against tax evasion or tax avoidance for the "G" factor.

• Promote the "double materiality" approach

  • Rating products would be required to disclose explicitly the rated entity's materiality

  • Specifically, rating products would be required to state whether the delivered rating addresses both material financial risk to the rated entity and the material impact of the rated entity on the environment and society, or whether the rating product takes into account only one of these.

• Encourage more transparency

  • ESG rating providers would be required to disclose to the public their methodologies, models and key rating assumptions

  • Information would also need to be made available about how ESG rating providers engage with stakeholders or how they deal with contradictory, inconsistent or subjective information.

• Boost competition

  • In particular, any entity seeking to obtain more than one ESG rating would be required to choose at least one ESG rating provider with a market share below 15%

  • In MEPs' opinion, this will drive competition among ESG rating providers and will foster an environment where smaller providers can enter the market.

Next Steps

Now that the ECON position has been adopted, the approved text will stand as the mandate for future negotiations with the other EU institutions and Member States.

We will report on key developments in due course.