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DRAFT 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

ECON-PR-753758

Committee on Economic and Monetary Affairs · Rapporteur: Aurore Lalucq

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The rapporteur's draft report sets out Parliament's amendments to the proposed regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities. It requires separate E, S and G ratings rather than a single aggregated metric, and bans aggregating the three factors. It strengthens rules on conflicts of interest, including a ban on consulting and audit activities to rated entities by group companies and employees. It requires entities seeking at least two ESG ratings to appoint at least one provider with no more than 5% market share in the Union. It tightens the regimes for third-country ESG rating providers and adds disclosure requirements on methodologies, data sources and limitations. It calls on the Commission to review the regulation's scope after three years, including whether to extend it to ESG data providers.

Committee position. The rapporteur proposes to amend the Commission proposal to require separate E, S and G ratings, strengthen conflict-of-interest rules, promote competition through a 5% market share requirement, tighten third-country regimes, and add disclosure requirements.

Key points

  1. Parliament adopts its position at first reading and calls on the Commission to refer the matter to Parliament again if it substantially amends its proposal.
  2. The regulation aims to enhance integrity, transparency, reliability, harmonisation, alignment with Union law, good governance, independence and quality of ESG rating activities, and to prevent greenwashing and social-washing.
  3. Non-profit civil society organisations offering free rating-like services are excluded from the regulation's scope.
  4. ESG ratings expressed as a single metric aggregating Environmental, Social and Governance factors are considered detrimental to reliability and comparability and should not be permitted; separate E, S and G ratings must be provided.
  5. Entities seeking more than one ESG rating should choose at least one provider with a market share below 5%; ESMA must annually publish a list of registered providers with their total market share.
  6. Third-country ESG rating providers may offer services in the Union only under equivalence, endorsement or recognition; compliance with IOSCO recommendations does not in itself constitute equivalence.
  7. ESG rating providers must not offer consulting, credit ratings, benchmarks, investment, audit, banking, insurance or reinsurance activities; group entities must not provide consulting or audit to rated entities, and employees involved in assessment must not provide such activities.
  8. ESMA shall require providers to mitigate conflicts of interest, may require them to cease activities or relationships creating conflicts, and providers must publicly disclose all existing or potential conflicts.
  9. Persons involved in rating must not buy or sell financial instruments of rated entities or their group, must not take up a position within a rated entity for one year after rating, and must not accept gifts or favours unless trivial.
  10. ESG rating providers must disclose methodologies, models and key rating assumptions on their website, and provide detailed information to subscribers and rated entities, including on data sources, limitations and conflicts of interest.
  11. ESMA shall develop draft regulatory technical standards on disclosures and on safeguards against conflicts of interest, to be submitted to the Commission within 6 months of entry into force.
  12. The Commission shall publish a report after three years on whether the regulation's scope is sufficient, including the need to extend it to ESG data providers, and on the functioning of the ESG rating market.

Who is affected

  • ESG rating providers: must meet transparency, independence and conflict-of-interest rules, and provide separate E, S and G ratings.
  • Third-country ESG rating providers: must be legally established, authorised and registered in a third country and meet equivalence, endorsement or recognition conditions.
  • Financial institutions using ESG ratings: bear responsibility for greenwashing accusations concerning their financial products.
  • Entities seeking multiple ESG ratings: should choose at least one provider with a market share below 5%.
  • Non-profit civil society organisations offering free rating-like services: excluded from the regulation's scope.

Figures and deadlines

  • over 3000 signatories representing over EUR 100 trillion of assets under management (UN Principles for Responsible Investment)
  • 1.5 degree Celsius threshold for global warming
  • at least 5% market share threshold for ESG rating providers
  • 5% threshold for shareholding or voting rights triggering prohibitions on cross-holdings in other ESG rating providers
  • one year after rating before taking a position within a rated entity
  • three years for recent employment, business or other relationship with rated entity
  • 6 months after entry into force for ESMA to submit draft regulatory technical standards
  • 3 years after entry into force for Commission report on scope and market functioning

Legal basis: Article 294(2) and Article 114 of the Treaty on the Functioning of the European Union