Opinion of the Committee on Legal Affairs on a 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

29.11.2023

Ms Irene Tinagli

Chair

Committee on Economic and Monetary Affairs

BRUSSELS

Subject: Opinion of the Committee on Legal Affairs on a 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 (COM(2023)0314 – C90203/2023 – 2023/0177(COD))

Dear Madam Chair,

At the meeting of 23 October 2023, the Coordinators of the Committee on Legal Affairs decided to give an opinion, in accordance with Rule 56(1) of the Rules of Procedure, 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 opinion was attributed to the Socialist and Democrats Group and Mr Pascal Durand was nominated the Rapporteur. However, due to a very tight schedule of the ECON Committee the Coordinators, in written procedure on 17 November decided to change the format opinion into a letter while keeping the same Rapporteur.

Suggestions:

At its meeting of 29 November 2023, the Committee on Legal Affairs accordingly decided, by 13 votes in favour, 10 votes against and no abstentions, to call on the Committee on Economy and Monetary Affairs, as the committee responsible, to take into account the following when preparing their draft legislative report.

The proposal for a Regulation on the transparency and integrity of ESG rating activities comes as a crucial legislative vehicle to provide investors and stakeholders with reliable information on the qualitative nature of sustainable products as well as of the degree of sustainability of companies’ businesses and strategies. The EU has put in place the building blocks for a sustainable finance framework with the adoption of the Sustainable Finance Disclosure Regulation, Directive (EU) 2019/2088, the Corporate Sustainability Reporting Directive Directive (EU) 2022/2464 and the proposal for a Directive on Corporate Sustainability Due Diligence (2022/0051(COD)). Nevertheless, neither the Commission’s proposal regarding ESG rating activities nor the draft report in the ECON committee of Parliament sufficiently consider the need to ensure the consistency of this proposal with provisions in the concerned EU policy area. By not considering what constitutes the performance of EU companies as a whole, this proposal fails to prevent legislative loopholes on the way companies’ performances on sustainable matters are evaluated, increasing the risk to ultimately misguide investments and boards’ decisions.

EU regulations require investors and undertakings operating in the EU to report both on the impacts of companies’ activities on people and the environment, and on how sustainability matters affect the companies. This is referred to as the double materiality perspective, in which the risks for the undertaking and the latter’s impacts represent one materiality perspective each. While companies and investors based in the EU will comply with their reporting obligations on both the financial and sustainability impacts, the current proposal leaves the possibility for ESG rating providers to consider - either directly or through equivalence criteria - only one side of EU-based companies’ performance. At this stage, it is thus failing to ensure a level-playing field with rated entities that do not consider a double materiality perspective.

Using methodologies that fail to consider what makes EU companies’ business models more sustainable would pose a great risk to have European companies rated and benchmarked against other entities, and affected in their competitiveness.

The suggestions agreed by the Committee on Legal Affairs are the following:

1. To ensure consistency with existing European Union policies: all relevant pieces of Union legislation relating to sustainability disclosure, including Directive 2013/34/EU and its delegated act, Regulation (EU) 2019/2088 of the European Parliament and of the Council, Regulation (EU) 2020/852 of the European Parliament and of the Council and Directive (EU) 2022/2464 of the European Parliament and of the Council, define or refer to the mandatory application of the principle of double materiality in companies’ reports. These existing reporting obligations can be of concrete use only if all ESG rating providers apply the same principle to the greatest extent possible. When providing E, S, and G ratings, either aggregated or separately, said providers should thus take into account all the relevant and material sustainability information falling within the scope of a rated entity’s activities, for each of the materiality dimensions. This should not entail ESG rating providers considering every single sustainability piece of information reported by the rated entity, but rather that the information considered in the rating methodologies should include both the financial and the impact dimensions of materiality, in coherence with EU reporting obligations for companies.

2. To ensure transparent and proper due process on setting equivalence, endorsement and recognition criteria: when adopting delegated acts regarding the provision of ESG ratings in the Union by third country ESG rating providers, the European Commission shall take into consideration technical advice from an expert group, provided that such advice has been developed with proper due process, public oversight and transparency, with the expertise and balanced participation of relevant stakeholders. Moreover, participation in this expert group’s work at technical level should be based on expertise in sustainability reporting, and not be conditional on any financial contribution.

Yours sincerely,

Adrián Vázquez Lázara

ANNEX: entities or persons

from whom the rapporteur for the OPINION has received input

The rapporteur has received input from the following entities or persons in the preparation of the opinion in letter form:

Entity and/or person

Global Reporting Initiative (GRI)

The list above is drawn up under the exclusive responsibility of the rapporteur.