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REPORT (COM(2023)0314 – C90203/2023 – 2023/0177(COD))

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

A-9-2023-0417

Committee on Economic and Monetary Affairs · Rapporteur: Aurore Lalucq

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Parliament's amended version of the Commission proposal for a regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities. It sets authorisation and supervision by the European Securities and Markets Authority (ESMA), rules for third-country providers, and requirements on methodology, conflicts of interest and disclosure. ESG rating providers must be authorised by ESMA, use rigorous and reviewed methodologies, separate E, S and G ratings, and disclose methodologies and data sources publicly and to subscribers and rated entities. Providers must prevent and manage conflicts of interest, may not offer consulting, credit ratings, benchmarks or audit, and must ensure analyst independence and record-keeping. Third-country providers may operate through equivalence, endorsement or recognition, and ESMA supervises, investigates, inspects and can fine providers up to 10% of total annual net turnover. Smaller providers get exemptions and transitional periods, and the Commission must review the regulation, including whether to extend it to ESG data providers.

Committee position. The Committee on Economic and Monetary Affairs proposes to adopt Parliament's position at first reading with amendments to the Commission proposal, setting authorisation and supervision by ESMA, rules for third-country providers, and requirements on methodology, conflicts of interest and disclosure.

Key points

  1. The 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.
  2. It applies to ESG ratings issued by providers operating in the Union that are disclosed publicly or distributed to regulated financial undertakings, companies under Directive 2013/34/EU, or public authorities.
  3. It excludes private ratings, internal ratings of regulated financial undertakings, ESG data without rating or scoring, credit ratings, second-party opinions, ratings by public authorities and ESCB members, and certain disclosures under Regulations (EU) 2019/2088 and (EU) 2020/852.
  4. Legal persons established in the Union must apply to ESMA for authorisation; ESMA assesses completeness within 20 working days and decides within 90 working days, extendable to 100.
  5. Third-country providers may provide ratings in the Union only through an equivalence decision, endorsement by an authorised Union provider in the same group, or recognition by ESMA.
  6. ESG rating providers must ensure independence, use rigorous and continuously applied methodologies reviewed at least annually, and maintain an independent oversight function.
  7. Providers may not offer consulting, credit ratings, benchmark development or audit activities, and must take measures to prevent conflicts of interest.
  8. Rating analysts and other involved persons must be trained, must not trade financial instruments of rated entities, and face restrictions on moving to rated entities.
  9. Providers must disclose methodologies, models and key rating assumptions publicly, and provide more detailed information to subscribers and rated entities, including on double materiality and limitations.
  10. Separate E, S and G ratings must be provided rather than a single aggregated metric, unless the provider discloses and justifies the weighting of each component on the same scale.
  11. ESMA may impose fines up to 10% of total annual net turnover and periodic penalty payments of 3% of average daily turnover, or 2% of average daily income for natural persons.
  12. Small and medium-sized providers may be exempt from certain governance requirements and get longer transitional periods to apply for authorisation.

Who is affected

  • ESG rating providers operating in the Union must obtain authorisation from ESMA and comply with organisational, disclosure and conduct rules.
  • Third-country ESG rating providers may offer services only under equivalence, endorsement or recognition regimes.
  • Regulated financial undertakings, companies under Directive 2013/34/EU and public authorities that use ESG ratings are covered by the scope.
  • Rated entities must be notified before being rated and receive detailed information on the rating.
  • Small and medium-sized ESG rating providers benefit from exemptions and longer transitional periods.

Figures and deadlines

  • ESMA must assess completeness of an authorisation application within 20 working days.
  • ESMA must adopt a decision on authorisation within 90 working days, extendable to 100 working days.
  • ESMA must assess completeness of an endorsement application within 30 working days and verify requirements within 45 working days.
  • ESMA must verify recognition conditions within 90 working days.
  • Maximum fine is 10% of total annual net turnover.
  • Periodic penalty payments are 3% of average daily turnover, or 2% of average daily income for natural persons, for a maximum of six months.
  • Existing providers must notify ESMA within 3 months and apply for authorisation within 6 months; small and medium-sized providers within 24 months.
  • The regulation applies from 9 months after entry into force.

Legal basis: Article 114 of the Treaty on the Functioning of the European Union.