New ESG Ratings Regulation in the European Union

March 25, 2024 EcoVadis EN

EcoVadis welcomes the EU reaching a deal on the bloc’s first-ever set of regulations for Environmental, Social and Governance (ESG) ratings providers. The regulation introduces enhanced methodology disclosures, industry standards for managing conflicts of interest, and market supervision by ESMA (European Securities and Markets Authority).

As reliance on ESG ratings to inform investors and corporates’ decision-making increases, there’s a growing need for formal scrutiny. “We welcome the EU’s initiative introducing standardized transparency and integrity requirements. It is an important step forward for this dynamic and innovative industry. ESG ratings are no silver bullet but they play an important role in the green transition.” said our co-CEO, Pierre-François Thaler. 

ESMA Given Regulatory Power

Raters wishing to operate in the EU will have to obtain authorization from ESMA, or in the case of providers based outside the bloc, an endorsement from a peer regulated in the EU.

While the primary focus of the regulation is ESG ratings used in financial markets, the regulation captures supply-chain ratings used in procurement by corporates, impacting providers in non-financial sectors. In this context, the regulation explicitly recognizes that the ESG ratings market is diverse.

As a provider of business sustainability ratings, EcoVadis will therefore have to seek ESMA’s recognition. After the entry into force, expected at the end of 2024, or early 2025 at the latest, providers will have an 18 months implementation period before registering with ESMA. In the meantime, ESMA is required to submit additional technical guidelines 9 months after the entry into force, to clarify the expectations for providers looking to be authorized. EcoVadis will proactively review its current transparency practices and management of conflicts of interest throughout this process. 

More Transparency

ESG ratings products remain on the rise, in tandem with the heightened demand for sustainability data. Trillions of investment money flow into sustainable funds and products; many of these decisions depend on exactly this data. Naturally, pressure has been building to improve transparency and ensure the good conduct of the ESG ratings landscape. 

The final agreed rules say that providers should publish their rating assumptions, explain whether E, S and G factors are considered separately or in aggregation, and disclose the weighting given to each factor. The text also requires public disclosure of whether providers adopt a single or double materiality lens for their assessment process, advertently promoting double materiality to align ratings with the approach to corporate sustainability reporting that the EU is taking with SFDR (for investors) and CSRD (for corporates). 

“We commend the requirement to publish granular details on what a rating seeks to measure, and the methodology behind it,” said Sylvain Guyoton, Chief Rating Officer at EcoVadis. “The extent to which the details of rating practices are publicly communicated varies largely among different providers. From this perspective, the proposed disclosure scheme will likely level out information asymmetries and thus make ratings more useful."

About the Author

EcoVadis EN

EcoVadis is a purpose-driven company whose mission is to provide the world's most trusted business sustainability ratings. Businesses of all sizes rely on EcoVadis’ expert intelligence and evidence-based ratings to manage risk and compliance, drive decarbonization, and improve the sustainability performance of their business and value chain. Its AI-powered risk mapping, actionable scorecards, benchmarks, carbon action tools, and insights guide a resilience and improvement journey for environmental, social and ethical practices across 200 industry categories and 175 countries.

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