New regulations for ESG rating providers could cause significant restructuring in the industry.
Author: Maria-Antoanela Ioniță – Sustainability Communications Specialist
In the last few years, environmental, social, and governance (ESG) rating providers have multiplied in an attempt to signal sustainability efforts and results to company stakeholders. Yet critics argue that most methodologies are often too opaque and complex. In addition, they tend to favour companies that disclose more information rather than those that manage ESG risks best. These drawbacks limit the potential positive of ESG ratings to incentivise more sustainable investment.
To tackle these concerns and aid investors looking for more useful and reliable information while also tackling greenwashing, EU authorities have introduced new regulations for ESG rating providers as part of a sustainable finance package.
These regulations have the potential to cause significant restructuring within the industry. Major players in the market, such as S&P Global, Moody’s, MSCI, and Morningstar’s Sustainalytics offer ESG ratings that influence trillions of dollars in investment decisions.
Under the proposed legislation, ESG rating providers would be prohibited from offering consulting services to investors, selling credit ratings, developing benchmarks, and engaging in other activities that could result in conflicts of interest. Agencies will thus have to separate these various business functions.
ESG rating providers will also be required to obtain authorization and be supervised by the European Securities and Markets Authority (ESMA).
Failure to comply with the new rules could lead to fines of up to 10% of their annual net turnover.
The package of measures aimed to boost sustainable finance also contains a new set of EU Taxonomy criteria for economic activities that make a substantial contribution to one or more of the non-climate environmental objectives. These objectives include the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems.
To support companies and the financial sector in the implementation of the EU Taxonomy and sustainable finance framework, the European Commission is also publishing the EU Taxonomy User Guide, a guidance document on the Taxonomy for non-experts.
You can find out more details in this Press Release: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_3192
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