Regulation (EU) 2024/3005 on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities

What it is

PURPOSE: to lay down a consistent and effective regime to address the shortcomings and vulnerabilities that environmental, social, and governance ratings pose. PROPOSED ACT: Regulation of the European Parliament and of the Council. ROLE OF THE EUROPEAN PARLIAMENT: the European Parliament decides in accordance with the ordinary legislative procedure and on an equal footing with the Council. BACKGROUND: environmental, social, and governance (ESG) investing, that is, investing which takes ESG factors into account when making investment decisions, is becoming an important part of mainstream finance. Notably, investment funds with sustainable characteristics or objectives have largely increased in number, size and the type of capital they attract. In this context, an ESG investment ecosystem has developed, including amongst others the supply of ESG ratings. Such ESG ratings are marketed as providing an opinion on the exposure of a company or entity to environmental, social and/or governance factors , and their impact on society. The Committee on Economic and Monetary Affairs adopted the report by Aurore LALUCQ (S&D, FR) on the proposal for a regulation of the European Parliament and of the Council on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities. The committee responsible recommended that the European Parliament's position adopted at first reading under the ordinary legislative procedure should amend the proposal as follows: The proposed Regulation introduces a common regulatory approach to enhance the integrity, transparency, comparability, responsibility, reliability, alignment with Union law, good governance, and independence of ESG rating activities, contributing to the transparency and quality of ESG ratings. It aims to contribute to the smooth functioning of the internal market, while achieving a high level of consumer and investor protection and preventing greenwashing or other types of misinformation, including social-washing. The rules relating to ESG rating providers should not apply to ESG ratings drawn up by European financial companies and used exclusively for internal purposes or shared within their group. The European Securities and Markets Authority (ESMA) should draw up draft regulatory standards to strictly delineate what constitutes internal use. These rules should not apply to ratings issued by a member of the European System of Central Banks (ESCB). Any legal person who wishes to provide ESG ratings in the Union should be subject to either of the following: an authorisation issued by ESMA; an implementing decision; an authorisation for endorsement. Until the Commission has adopted an equivalence decision, third country ESG rating providers may provide ESG ratings to regulated financial undertakings in the Union, provided that ESMA has recognised that third country ESG rating provider. A third country ESG rating provider recognised by ESMA should demonstrate that establishing a legal presence within the Union would be disproportionate to the nature, size and complexity of the third country ESG rating provider. ESMA should take into account whether the third country ESG rating…

Official title: Regulation (EU) 2024/3005 of the European Parliament and of the Council of 27 November 2024 on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities, and amending Regulations (EU) 2019/2088 and (EU) 2023/2859 (Text with EEA relevance)