On 13 June 2023, the Commission published a series of initiatives aimed at enhancing sustainable finance rules for the financial industry and businesses at large. The objective is to enable investors to make well-informed decisions in their investment strategies while channeling funds to sustainable activities. 

Within the same legislative package, the Commission has put forward a proposal to regulate environmental, societal, and governance (ESG) rating providers. The regulation takes into account the new requirements imposed on financial institutions and market participants by the sustainable finance legislation, including the Corporate Sustainability Reporting Directive (CSRD, Directive (EU) 2022/2464) and the EU Taxonomy Regulation. 

Building upon the existing legal framework applicable to credit rating agencies (CRAR, Regulation (EU) 1060/2009), the Commission now intends to regulate ESG rating providers by addressing: 

• The necessity to clarify how ESG rating providers operate, focusing on the prevention of conflicts of interests within their activities; and 
• The need to improve transparency of ESG ratings characteristics (i.e., the kind of information they provide, their objectives, the methodologies used, and the data sources or estimates for their development). 

In this context, the Commission aims to establish operating conditions for ESG rating providers, which will now need to seek authorization by the European Securities and Markets Authority (ESMA). Similar rules are established for third-county ESG rating providers, who will have to possess an equivalence, an endorsement, or a recognition from ESMA to operate in the European Union. Additionally, ESMA is mandated to develop regulatory technical standards further specifying the conditions for authorization set under Annex I of the regulation. 

The proposal outlines principles to ensure the integrity and reliability of ESG rating activities, namely in their internal organization, procedures, and governance on the issuance of ESG ratings. The Commission aims to ensure that their activities are independent and separated from other functions that ESG rating providers may offer (e.g., consulting, audit, sale of credit ratings, or development of benchmarks). To address any potential conflict of interest arising from their business, the proposed regulation requires ESG rating providers to establish a clear organizational structure while defining the roles and responsibilities of all employees involved in rating activities. 

The Commission published the proposal for consultation, which will run until 10 August 2023. On 10 July, the EU member states financial services attachés had a first round of discussion on the proposal, while the European Parliament Committee on Economic and Monetary Affairs (ECON Committee) will be responsible for the file. The upcoming European Parliament’s elections in June 2024, and the consequent changes of the Commission’s college, are likely to delay the adoption of the regulation.