Proposal for a European ESG Ratings Regulation

There is currently no EU-wide legal regime for ESG ratings. Thus, the initiative does not aim to harmonise methodologies for the calculation of ESG ratings, but to increase their reliability, comparability and transparency, given their growing impact on the functioning of capital markets and on investor confidence in sustainable products as a driver of sustainable finance.

One of the main new features is the distinction between "rating" and "scoring" to address the needs of the two main users of the information provided by rating providers. On the one hand, there is the need for ESG fund managers to have a scoring system tailored to their needs. And on the other hand, there are the needs of listed companies and issuers, who instead demand authentic and transparent ratings that provide the market with a homogeneous system of comparison on the basis of the sustainability objectives set by the European Union and that are not influenced by ethical and subjective choices.

The "scoring" system is aimed at fund managers, and is a model that relies mainly on questionnaires sent to companies or on data collection systems that lend themselves to interpretation and to the particular interests of the different management policies of users, in order to provide the manager with a set of data useful for his investment decisions.

By contrast, the ESG 'rating' is characterised, according to the Commission, by the 'closed' opinion of an analyst, who assumes responsibility for it on condition that a standardised and pre-established evaluation system is used from the outset, offering comparability and based on a homogeneous algorithm which is publicly disclosed. On the detail of the ratings, the proposal sets out the specific criteria that should guide the rating methodologies, which should be rigorous, systematic, objective, continuous, subject to validation and reviewed annually.

As set out in the Proposal, this distinction will achieve the main purpose of the initiative to improve the quality of ESG ratings. This will enable investors to make more informed investment decisions aligned with sustainability objectives, and companies and issuers to disclose in a consistent and subjective manner.

In addition, the proposal puts the focus on transparency by obliging rating providers offering services to investors and companies in the European Union to be authorised and supervised by the European Securities and Markets Authority (ESMA), which will be able to request information, conduct investigations and inspections, as well as impose sanctions (which could reach 10% of turnover).

ESMA will therefore serve as a centralised platform to make this information on approved providers and ESG ratings publicly available. It is even envisaged that by 2028 certain information will have to be published on the Single European Access Point in machine-readable format.

The proposal also sets out obligations on good governance and the proper management of potential conflicts of interest, and suggests that rating providers should not also be allowed to carry out other professional activities that could undermine their objectivity, such as auditing or consultancy.

These new measures involve additional activities to the EU Taxonomy and propose new rules for the