Environmental, Social and Governance (ESG) Rating
The Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities (ESG Rating Regulation – Regulation (EU) 2024/3005) introduces a common regulatory approach to enhance the integrity, transparency, comparability where possible, responsibility, reliability, good governance and independence of ESG rating activities. This Regulation supports the EU’s sustainable finance goals by enhancing the quality of ESG ratings and protecting consumers and investors. It also aims to prevent greenwashing and misinformation by establishing clear rules for ESG rating providers.
ESG rating providers must be authorized and supervised by the European Securities and Markets Authority (ESMA). The Regulation requires ESG rating providers to disclose their methodologies and objectives, ensuring clarity and understanding of their ESG rating products. Financial institutions developing their own ESG ratings are also required to disclose similar information.
Within this Regulation the following key definitions apply:
ESG rating means an opinion or a score, or a combination of both, regarding a rated item’s profile or characteristics with regard to environmental, social and human rights, or governance factors, or regarding a rated item’s exposure to risks or impact on environmental, social and human rights, or governance factors, that is based on both an established methodology and a defined ranking system of rating categories, irrespective of whether such ESG rating is labelled as “ESG rating”, “ESG opinion” or “ESG score”.
ESG rating provider means a legal person whose activities include the issuance, and the publication or distribution, of ESG ratings on a professional basis.
ESG rating providers shall not provide any of the following activities:
- Consulting activities;
- Issuance and distribution of credit ratings as defined in the Regulation (EC) No 1060/2009;
- Provision of benchmarks as defined in the Regulation (EU) 2016/1011;
- Investment services and activities as defined in the Directive 2014/65/EU;
- Statutory auditing on financial statements and assurance engagements on sustainability reporting within the meaning of Directive 2013/34/EU;
- Activities of credit institutions within the meaning of the Regulation (EU) No 575/2013, and insurance or reinsurance activities within the meaning of Directive 2009/138/EC.
Before the Regulation was introduced, the market of ESG ratings was unregulated and suffered from lack of standardisation, lack of transparency (on methodologies, data used, processes, interaction with rated entities, etc.) and conflicts of interest.
Following market consultations and research, it was acknowledged that ESG ratings play an important role in global capital markets, as investors, borrowers, and issuers increasingly use ESG ratings as part of the process of making informed decisions relating to sustainable investment and financing. Better comparability and increased reliability of ESG ratings would enhance the efficiency of that fast-growing market, thereby facilitating progress towards the objectives of the European Green Deal.
The objective of the ESG Rating Regulation is to enhance the transparency and reliability of ESG ratings. The Regulation ensures that investors and other stakeholders have access to clear, comparable, and trustworthy information about ESG ratings and their methodologies. By doing so, it aims to reduce greenwashing, promote sustainable investments, and foster confidence in the sustainability performance of companies.
With the Regulation, the ESG rating providers must disclose their methodologies, models, and key rating assumptions, ensuring greater transparency and comparability. The Regulation imposes governance requirements on ESG rating providers to manage conflicts of interest and ensure their independence and it requires ESG rating providers offering services in the EU to be authorized and supervised by the ESMA.
The ESG Rating Regulation applies to ESG rating providers operating within the EU, including both providers established in the EU and providers established outside the EU, but offering services to EU-based clients.
It also applies to financial institutions that develop their own public ESG ratings. These entities must comply with the Regulation’s requirements on transparency, governance, and disclosure to ensure the reliability and comparability of ESG ratings.
The Regulation does not apply to:
- Private ESG ratings which are not intended for public disclosure or distribution;
- ESG ratings produced by regulated financial undertakings in the EU for internal purposes or for providing in-house financial services’ products;
- The provision of raw ESG data that does not contain an element of rating or scoring and is not subject to any modelling or analysis resulting in an ESG rating;
- Credit ratings issued pursuant to Regulation (EC) No 1060/2009;
- Products or services that incorporate an element of an ESG rating, including investment research;
- External reviews of European Green Bonds, as provided for in Regulation (EU) 2023/2631;
- Second-party opinions on sustainability bonds;
- ESG ratings produced by Member States, public authorities, or central banks, subject to certain conditions;
- ESG ratings from an authorized ESG rating provider that are made available to users by a third party;
- ESG ratings developed exclusively for accreditation or certification processes, which do not target investment analysis, financial analysis, investment decision-making or financial decision-making;
- Labelling activities provided that the labels granted to the relevant entities, financial instruments or financial products do not involve the disclosure of an ESG rating;
- ESG ratings published or distributed by non-profit organisations for non-commercial purposes (in case they charge – they are subject to the Regulation).
Financial institutions developing their own public ESG ratings must disclose their ESG rating methodologies and objectives, ensuring that investors and stakeholders have access to clear and comparable information.
Financial institutions using ESG ratings issued by ESG rating providers will benefit from: clear and comparable information about ESG ratings and methodologies, additional disclosures by ESG rating providers, transparent pricing structures for ESG rating services, as well as measures to identify, manage, and disclose conflicts of interest, ensuring unbiased ratings.
Financial institutions rated by ESG rating providers will be notified during their working hours and at least two full working days before the first issuance of the ESG rating in order to give the rated item or the issuer of the rated item an opportunity to inform the ESG rating providers of any factual errors.
The ESG Rating Regulation complements the SFDR Regulation by ensuring that financial institutions developing their own ESG ratings disclose the same information as specialized ESG rating providers.
(Visit the SFDR Regulation for more information).
There are no specific adaptations in the Luxembourg regulatory framework with regards to this matter.
- 27 November 2024: The Regulation was adopted by the European Parliament and the Council;
- 12 December 2024: The Regulation was published in the Official Journal of the European Union;
- 01 January 2025: The Regulation enters into force;
- 02 October 2025: ESMA shall submit the draft regulatory technical standards;
- 02 July 2026: Application date of the ESG Rating Regulation;
- 01 January 2028: When making public any information required by the Regulation, the ESG rating provider shall submit that information at the same time to the collection body for the purpose of making it accessible on the European single access point (ESAP);
- 02 January 2029: The Commission shall evaluate the application of the ESG Rating Regulation.
- 06 July 2021: Renewed EU Sustainable Finance Strategy, including a pledge to improve reliability, comparability and transparency of ESG ratings;
- 03 February 2022: ESMA Call for Evidence and targeted consultation on ESG ratings;
- 04 April 2022: The Commission launches of a call for evidence to gather stakeholders’ views about the use of ESG ratings, its functioning and potential issue;
- 27 June 2022: ESMA publishes results of its Call for Evidence on ESG ratings;
- 13 June 2023: The Commission presented a proposal on a Regulation on transparency and integrity of ESG rating activities, as part of its renewed sustainable finance strategy;
- 05 February 2024: The Council and European Parliament reached provisional agreement on proposed EU ESG Rating Regulation;
- 27 November 2024: The Regulation was adopted by the European Parliament and the Council;
- 12 December 2024: The Regulation was published in the Official Journal of the European Union;
- 01 January 2025: The Regulation enters into force.
Currently, there is no consultation open or pending.
