EU agrees its first ever rules for ESG raters

The EU Parliament and Council recently signed off on its first ever ESG Rating Agency regulation. Within the regulation itself, the EU Commission claims that a “lack of clarity” around how ESG rating agencies operate and how their methodologies accurately assess a company’s ESG performance are the main drivers for needing this regulation. 

‍

As the regulation puts it, solving these core drivers will enable investors to make more informed decisions and assessments around companies’ non-financial risks and opportunities, while also providing more clarity to benchmarking solutions & administrators.

‍

Rating agencies, to be overseen by the The European Securities and Markets Authority (ESMA), will have to publicly disclose:

1. Explicit weighting of E, S and G pillars
2. If they cover how a company’s operations impact E, S and G factors
3. Any dimensions of Double Materiality they assess (i.e. driving ESG rating agencies towards assessing CSRD disclosures)
4. Whether environmental assessments align with the 2015 Paris Agreement on reducing carbon emissions

‍

The regulation is expected to come into effect in 2025, although boutique EU-based ESG rating agencies (not the likes of MSCI, S&P, Sustainalytics, etc.) will only need to comply with a “light version” of this regulation in the first three years of it coming into effect. 

‍

You can read the full regulation here, or for a short overview, you can find the press release here.

‍