EU moves to regulate ESG rating firms

ESG rating firms operating in the EU will soon be supervised by the European Securities and Markets Authority (ESMA) and required to disclose their methodology and sources of information – in the latest EU move to increase trust in sustainable finance.

The European Council and Parliament reached an agreement last night on how to regulate ESG rating firms in order to increase transparency and confidence in the sustainable investment ecosystem. 

ESG rating methodology transparency

Under the agreed rules, ESG rating providers established in the EU will need to be authorised by ESMA, while those headquartered outside of Europe that wish to operate in the EU will require the endorsement of an authorised EU provider. Non-EU rating firms will also be able to seek recognition of their methodology or be included in the EU registry if their country of origin implements equivalent regulations.

EU and non-EU ESG rating providers operating in Europe will also have to disclose their methodologies and the information they use to formulate their ratings, as well as the individual weighting of environmental, social and governance criteria in company scores.

Vincent Van Peteghem, the Belgian Minister of Finance, welcomed the agreement: “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.”

Now that the details of the regulation have been agreed upon, the EU ESG rating regulation will need to be approved by both the Council and the Parliament before going through the formal adoption procedure. Once adopted, ESG rating firms will have 18 months to comply.

EU ESG rating regulation: Increasing trust in sustainable finance

This is the latest effort by EU regulators to make sustainable finance more transparent and impactful. Last month, France updated its own legislation to prohibit funds bearing its socially responsible investment (ISR) label from investing in companies engaged in any new fossil fuel development from 2025 – a change expected to create ripples in the EU’s entire sustainable finance landscape.

A Morgan Stanley survey published this week also showed that investors are hungry for environmentally and socially responsible investments, but are still concerned about greenwashing and a lack of transparency in reporting. 

While US funds focused on ESG investments experienced their worst year in history in 2023 with US$5 billion of outflows in Q4 alone, their European peers managed to attract US$3.3 billion of net new money in the same quarter – suggesting greater trust in the European sustainable finance ecosystem.