New EU Regulation on ESG ratings published

Context

On 12 December 2024, Regulation (EU) 2024/3005 on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities (Regulation) was published in the Official Journal of the EU.

Scope

The Regulation applies to ESG rating providers which operate in the EU and, more specifically:

i) to ESG rating providers established in the EU:

ii) to ESG rating providers established outside the EU:

– when they issue and publish their ESG ratings on their website or through other means. – when they issue and distribute their ESG ratings by subscription or other contractual relationships to regulated financial undertakings in the EU, to undertakings that fall within the scope of Directive 2013/34/EU, to undertakings that fall within the scope of Directive 2004/109/EC, or to EU institutions, bodies, offices and agencies or Member State public authorities.

– when they issue and distribute their ESG ratings by subscription or other contractual relationships to regulated financial undertakings in the EU, to undertakings that fall within the scope of Directive 2013/34/EU, to undertakings that fall within the scope of Directive 2004/109/EC, or to EU institutions, bodies, offices and agencies or Member State public authorities.

This leaves a large number of undertakings and activities out of the Regulation’s scope, including, but not limited to:

• Private ESG ratings not intended for public disclosure or distribution.
• ESG ratings issued by regulated financial undertakings in the EU for internal purposes or in-house/intragroup financial services or products.
• ESG ratings issued by regulated financial undertakings in the EU and incorporated into products or services already regulated under EU law (e.g. SFDR, UCITS, AIFMD) and disclosed to third parties.
• ESG ratings issued by non-EU ESG rating providers that are not authorised or recognised, where distribution is at the exclusive initiative of the user.
• Publication or distribution of data on ESG factors.
• Credit ratings issued by credit rating agencies (CRAs).
• Products or services that include an element of an ESG rating.
• External reviews of European Green Bonds (EGBs) or second-party opinions on bonds marketed as “ESG”, provided they do not contain ESG ratings.
• Mandatory disclosures pursuant to Articles 6, 8, 9, 10, 11 and 13 of the SFDR.
• Disclosures pursuant to Articles 5, 6 and 8 of the EU Taxonomy Regulation.
• Labels, provided they do not disclose an ESG rating.

Implications for financial market participants

An important change is that the Regulation provides a full legal definition of what exactly is understood by:

• an ESG rating: “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”, noting that the definition holds “irrespective of whether such ESG rating is labelled as ‘ESG rating’, ‘ESG opinion’ or ‘ESG score’”.
• an ESG rating provider: “a legal person whose activities include the issuance, and the publication or distribution, of ESG ratings on a professional basis”.
• a regulated financial undertaking in the Union, which includes, among others, AIFMs, UCITS management companies, credit institutions, insurance and reinsurance undertakings.

Despite falling outside the scope of the obligations applicable to ESG rating providers, where a regulated financial undertaking in the EU discloses an ESG rating that fits the above description to third parties as part of its marketing communications, it will still have to comply with some minimum disclosure obligations and include specific information on its website, for example:

• the methodologies used;
• the relevant industry classification;
• data sources and processes;
• the limitations of methodologies and data sources;
• scientific evidence (if any);
• objective of the rating;
• the scope (E, S, or G factors; if all, then also including the weighting of each factor);
• conflicts of interest and related mitigation actions; and
• reference to the Paris Agreement’s objective.

The complete and detailed list of topics to be covered can be found under point 1 of Annex III to the Regulation (Annex III). The marketing communications in question, whether a website page, article, presentation slide deck or other, will need to include a link to those website disclosures.

Amendment to the Sustainable Finance Disclosure Regulation (SFDR)

An important consequence of the Regulation is that it amends Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector, more commonly known as the SFDR, by adding a provision to Article 13 of the SFDR and requiring financial market participants to include the information provided under point 1 of Annex III on their website if they disclose an ESG rating to third parties as part of their marketing communications.

In order to avoid any duplication of disclosures, those issuers which publish the required information pursuant to this new Article 13(3) of the SFDR are not required to do the exercise again for the purpose of the same obligation under the Regulation.

Next steps

The Regulation will enter into force 20 days after the date of publication in the Official Journal of the EU, on 1 January 2025, and will be applicable 18 months later, as of 2 July 2026. Within nine months after the entry into force, ESMA is expected to submit a set of draft Regulatory Technical Standards (RTS) to the EU Commission for review, which are expected to provide clearer indications on how the information prescribed by point 1 of Annex III will need to be disclosed.