ESG Ratings Regulation - EU reaches agreement

The EU has reached a provisional agreement on the upcoming ESG ratings regulation.

On 5 February, the EU reached a provisional agreement on the upcoming ESG ratings regulation. These EU proposals go further than the recent voluntary code of conduct. Overall, in addition to be significant for providers of ESG ratings within the EU, it will also impact their users, who in some cases (e.g., if subject to SFDR) will need to provide disclosures of ESG ratings used and/or will indirectly benefit from the increased regulation of their ESG ratings providers. key points to note are:

ESG rating providers (which could capture ESG products that don't fall within the traditional notion of ESG ratings) would need to be authorised and supervised by the European Securities and Markets Authority (ESMA) and comply with transparency requirements, in particular with regard to their methodology and sources of information.
Rating providers' different business activities would need to be separated, although some useful exemptions have been introduced to limit the impact of the segregation rules, for instance if raters can show that activities are clearly separated and no conflicts of interest exist.
the agreement foresees the possibility of providing separate E, S and G ratings. However, if a single rating is provided, the weighting of the E, S and G factors should be transparent.
ratings agencies would explicitly need to disclose whether the rating assesses both material financial risk to the rated entity and the material impact of the rated entity on ESG factors, to encourage more raters to address impact/double materiality.
Non-EU ESG ratings providers would also be caught, and would need to meet certain requirements in order to provide their ratings in the EU.
The Council and Parliament still need to approve the regulation, which would then apply 18 months after it enters into force.

The final ESG Ratings Regulation political agreement was published on 15 February, and the text of the final political agreement can be found here.