ESG-Short: Regulation of ESG rating agencies

ESG ratings play an important role in investment decisions. On 15 July 2023, the European Commission published draft legislation to improve ESG ratings. This underlines the EU Commission’s commitment to transparent and more valid ESG ratings. The deadline for feedback on the draft ended on 1 September 2023.
 
 

Summary of the opinions

The perspectives of two parties affected by ESG ratings are presented below.
 
Companies in the real economy, which serve as a data source for ESG ratings, provide the following feedback, among others:

• They criticise the fact that the various methods used by the rating agencies lead to inconsistent results and therefore no reliable sustainability profile can be created. The draft currently stipulates that these different methods should continue to be permitted.
• The draft law does not contain any provisions on the origin of the data. In order to improve the transparency and quality of the data, companies are in favour of using only publicly available information, for example from CSRD/ESRS publications.

 
The fund associations, who use the ratings, however, have different views on the following points, among others:

• To ensure the independence of an ESG rating agency, the draft prohibits certain ancillary activities such as consultancy, investments and much more. The associations are concerned that these prohibitions are too strict and could restrict the market too much.
• The draft does not refer to ESG rating methods that are only used internally. As the internal methods are often used by asset managers to calculate the proportion of adverse investments in the financial product and are subject to reporting requirements, they should also be taken into account in the regulation.

Next Steps

Before the draft bill becomes law, any feedback will be submitted to the European Parliament and the Council. It is not possible to predict which specific proposed amendments will be incorporated into the regulation. According to the EU action plan, adjustments to ESG ratings are to be made in 2023. However, due to the length of the legislative process, including the implementation phase, this is unlikely to be realised.