The European Council has reached an agreement on a proposal to regulate environment, social and governance (ESG) rating providers under the supervision of the European Securities and Markets Authority (ESMA).
The new rules aim to strengthen the reliability and comparability of ESG ratings by improving the transparency and integrity of the operations of the providers.
The aim is to make them more comparable and prevent potential conflicts of interests.
Under the proposed rules, ESG rating providers must disclose their methodology and sources of information.
The proposals, which were initially released by the European Commission in June 2023, were in response to concerns raised by ESMA about the current lack of regulation and potential risk to investors.
The Commission initially wanted a separation of business activities such as consulting or credit ratings from ESG ratings.
However, the Council’s position would not require a division of legal entities for these activities, as long as the providers establish a clear distinction between them as well as implement measures to avoid conflicts of interest.
The Council’s position also includes a temporary optional three-year regime for smaller ESG ratings providers, with no supervisory fees paid to the regulator and lighter compliance requirements.
Negotiations on the new regulation between the EU Parliament and Council are expected to begin in early 2024.
Last December, the Monetary Authority of Singapore (MAS) also issued a Code of Conduct for providers of ESG rating and data products.
The regulator established voluntary industry principles on transparency in methodologies and data sources, governance, and management of conflicts of interest.
© Markets Media Europe 2024
