European Council’s ESG rating pact: leveling up for sustainability goals.

The European Council has agreed on a new mandate to enhance the reliability of ESG ratings, which are used to assess a company’s sustainability profile. The key points of the agreement include:

  • ESG rating providers will require authorization and supervision by the European Securities and Markets Authority (ESMA) to ensure transparency in their methodology and information sources.
  • Providers will need to adhere to measures designed to prevent and manage conflicts of interest.
  • The regulation’s scope has been expanded to include exemptions and align with the corporate sustainable reporting directive, covering a broader range of factors like human rights.
  • Compliance with certain requirements, including ESMA authorization or equivalence recognition, is mandatory for ESG rating providers operating within the EU.
  • A lighter, optional registration regime has been introduced for small ESG rating providers to support smaller market players.
  • ESG rating providers will be allowed to have separate legal entities for certain activities, as long as clear distinctions and measures to avoid conflicts of interest are in place.

The agreement sets the stage for interinstitutional negotiations to begin in January 2024, potentially revolutionizing the landscape of ESG ratings and sustainable investing.