The EU has been developing its new ESG Ratings Regulation which will change how ESG raters operate within the European Union. Recently, a provisional agreement was reached indicating that the European Council and Parliament have agreed to the core provisions of the regulation. While we do not yet have the full draft text of the provisional agreement, the core requirements of the regulation were shared in a press release from the European Council which stated:
“ESG rating providers established in the EU will need to obtain an authorisation from ESMA. ESG rating providers established outside the EU that wish to operate in the EU will need to obtain an endorsement of their ESG ratings by an EU authorised ESG rating provider, a recognition based on a quantitative criterion or be included in the EU registry of ESG rating providers on the basis of an equivalence decision in relation to the country of its origin and following a dialogue held betweenESMA and the relevant third-country competent authority.”
In addition to being vetted through the ESMA, raters will also have to be more transparent about their rating methodologies and sources of information. Raters providing one aggregated score across E, S, and G will be required to indicate the weighting given to each category. The provisional agreement is not yet final, must continue through the formal adoption process and be approved by both the Council and Parliament. While it is unlikely that substantial changes will be made to the regulation, it is still possible. The regulation will come into effect 18 months after its official passage. This is another matter we are tracking and will provide updates as they are available.
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