The procedure for a European regulation on ESG ratings has started

The European Commission recently set in motion the procedure for the proposal for a Regulation by the European Parliament and by the Council on the on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities. 

The regulation is encompassed in the European Commission’s sustainable finance strategy, which aims to mobilize private capital towards investments contributing to achieving the sustainable development goals targeted by the UN and the European Green Deal.

The initiative clarifies that it is not intended to harmonize methodologies for calculating ESG ratings, but to increase their reliability, comparability and transparency, in view of their increasingly important impact on the operation of capital markets and on investor confidence in sustainable products.

It aims in particular to deal with certain deficiencies currently affecting these activities and which, broadly speaking, have meant that ESG ratings do not yet enable informed decisions to be made on the risks, impacts or opportunities related to certain products or entities.

To achieve this aim, the proposal puts forward a set of measures notably including, essentially, laying down a number of requirements for rating activities concerning organization, independence, integrity, conflict of interest prevention, quality and transparency of methodologies, etc., together with the creation of an authorization system for ESG rating providers by the European Securities and Markets Authority (ESMA), which is also given supervision functions including the power to request information, conduct investigations and inspections, as well as impose penalties.