EU agrees on its first ever rules for ESG raters in sector shake-up

Elite group: An employee walks past FTSE 100 share price information displayed on an illuminated rotating cube in the atrium of the LSE’s offices in London. Big firms like LSE dominate the ESG space in Europe. — Bloomberg

LONDON: European Union (EU) states and the European Parliament have reached a deal on the bloc’s first ever set of rules to regulate environmental, social and governance (ESG) ratings of company sustainability credentials, which guide trillions of investment dollars globally.

The bloc is introducing more rigour into ESG investing as regulators suspect “greenwashing”, or companies over-inflating their sustainability profile.

Under the incoming rules, hitherto unregulated ESG ratings providers in the EU will have to be authorised and supervised by the European Securities and Markets Authority.

Raters based outside the bloc will need to have their ratings endorsed by a rater regulated in the EU.

Raters will have to explicitly disclose if their ratings cover how a company’s operations affect the environment or social factors such as human rights, and not just the impact of ESG on a company’s bottom line.

The aim is to encourage more ratings that cover “double materiality”.

This is a two-way impact on both the company and the environment.

It is already embedded into EU sustainability disclosures applied by listed companies.

“Increasing investor confidence through transparent and regulated ESG ratings can have a significant impact on our transition to a more socially responsible and sustainable future,” said Vincent Van Peteghem, the finance minister of Belgium, which holds the EU presidency that helped to negotiate the deal.

“This agreement constitutes a historic breakthrough for sustainable finance,” said Aurore Lalucq, a French centre left member of the European Parliament who was also part of the negotiating team.

Raters will have to separate out ratings for ESG factors.

If a single ESG rating is supplied, the weighting of E, S and G should be explicit, with the social also including human rights.

A rating on the environment will have to say if it takes into account alignment with the Paris Agreement on reducing carbon emissions.

Smaller ESG raters based in the EU will only have to comply with a lighter version of the rules in the first three years to help them grow in a sector dominated by a handful of large players.

These include MSCI, S&P Global, London Stock Exchange Group or LSE, Moody’s and Morningstar’s Sustainalytics.

EU states and the European Parliament will need to give the formal nod to the deal, which would likely come into force sometime during 2025.

In a different approach, Britain has proposed a voluntary code of conduct for ESG raters ahead of possible regulation. —Reuters

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