Last week, the Council of the European Union adopted a new regulation on the regulation of ESG ratings.

With the new regulation, the EU wants to make ESG ratings more reliable and comparable and thus strengthen investor confidence in the business activities of rating agencies.

An ESG rating makes statements about the sustainability profile of a company by assessing the risks and impacts of a company’s business activities in the environmental, social and governance areas. Investors use ratings to analyse the sustainability performance of companies in their portfolios.

Key elements of the new regulation:
➡️ Providers of ESG ratings must be authorised and supervised by the European Securities and Markets Authority (ESMA).
➡️ The agencies must fulfil various transparency requirements, e.g. they must disclose the methods, models and assumptions they use on their website.
➡️ Smaller rating providers may be exempted from some of ESMA’s requirements in duly justified cases.
➡️ Rating providers may not provide services that could lead to conflicts of interest, e.g. investment or auditing activities.