Changes from plenary report to adopted text

RemovedDRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION

AddedP9_TA(2024)0347

Changedon the proposal for a regulation of the European Parliament and of the Council on the transparencyTransparency and integrity of Environmental, Social and Governance (ESG) rating activities

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

AddedCommittee on Economic and Monetary Affairs

AddedPE753.758

AddedEuropean Parliament legislative resolution of 24 April 2024 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 (COM(2023)0314 – C9-0203/2023 – 2023/0177(COD))

▸6 unchanged paragraphs

(Ordinary legislative procedure: first reading)

The European Parliament,

– having regard to the Commission proposal to Parliament and the Council (COM(2023)0314),

– having regard to Article 294(2) and Article 114 of the Treaty on the Functioning of the European Union, pursuant to which the Commission submitted the proposal to Parliament (C90203/2023),

– having regard to Article 294(3) of the Treaty on the Functioning of the European Union,

– having regard to the opinion of the European Central Bank of 4 October 2023,

Changed– having regard to the opinion of the European Economic and Social Committee of …,25 October 2023,

Added– having regard to the provisional agreement approved by the committee responsible under Rule 74(4) of its Rules of Procedure and the undertaking given by the Council representative by letter of 14 February 2024 to approve Parliament’s position, in accordance with Article 294(4) of the Treaty on the Functioning of the European Union,

▸6 unchanged paragraphs

– having regard to Rule 59 of its Rules of Procedure,

– having regard to the letter from the Committee on Legal Affairs,

– having regard to the report of the Committee on Economic and Monetary Affairs (A9-0417/2023),

1. Adopts its position at first reading hereinafter set out;

2. Calls on the Commission to refer the matter to Parliament again if it replaces, substantially amends or intends to substantially amend its proposal;

3. Instructs its President to forward its position to the Council, the Commission and the national parliaments.

Change 1

RemovedAMENDMENTS BY THE EUROPEAN PARLIAMENT*

AddedP9_TC1-COD(2023)0177

Removedto the Commission proposal

AddedPosition of the European Parliament adopted at first reading on 24 April 2024 with a view to the adoption of Regulation (EU) 2024/… of the European Parliament and of the Council on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities, and amending Regulations (EU) 2019/2088 and (EU) 2023/2859

Removed---------------------------------------------------------

Added(As an agreement was reached between Parliament and Council, Parliament's position corresponds to the final legislative act, Regulation (EU) 2024/3005.)

Removed2023/0177 (COD)

RemovedREGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

Removedon the transparency and integrity of Environmental, Social and Governance (ESG) rating activities

Removed(Text with EEA relevance)

RemovedTHE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

RemovedHaving regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

RemovedHaving regard to the proposal from the European Commission,

RemovedAfter transmission of the draft legislative act to the national parliaments,

RemovedHaving regard to the opinion of the European Economic and Social Committee,

RemovedActing in accordance with the ordinary legislative procedure,

RemovedWhereas:

Removed(1) On 25 September 2015, the UN General Assembly adopted a new global sustainable development framework: the 2030 Agenda for Sustainable Development, having at its core the Sustainable Development Goals (SDGs). The Commission's Communication of 2016 on the next steps for a sustainable European future links the SDGs to the Union policy framework to ensure that all Union actions and policy initiatives, within the Union and globally, take the SDGs on board at the outset. The European Council conclusions of 20 June 2017 confirmed the commitment of the Union and the Member States to the implementation of the 2030 Agenda in a full, coherent, comprehensive, integrated and effective manner and in close cooperation with partners and other stakeholders. In addition, the UN Principles for Responsible Investment has over 3000 signatories representing over EUR 100 trillion of assets under management. On 11 December 2019, the Commission published its communication on ‘The European Green Deal’. On 30 June 2021, the European Parliament and the Council signed the European Climate Law which enshrines into Union law the goal set out in the Commission’s communication of 11 December 2019 entitled ‘The European Green Deal’ (the ‘European Green Deal’) of Union economy and society becoming climate-neutral by 2050.

Removed(2) The transition to a sustainable economy is key to ensuring the long-term competitiveness and sustainability of the Union economy and the quality of life of citizens in the Union and to keeping global warming well below the 1.5 degree Celsius threshold. Sustainability has long been at the heart of the Union project and the Union Treaties give recognition to its social and environmental dimensions.

Removed(3) Achieving SDG objectives in the Union requires the channelling of capital flows towards sustainable investments. It is necessary to exploit fully the potential of the internal market for the achievement of those goals. In that context, it is crucial to remove obstacles to the efficient movement of capital towards sustainable investments in the internal market and to prevent such obstacles from emerging and to set rules and standards to, on the one hand, incentivise sustainable finance and, on the other, disincentivise investments that can adversely impact the achievement of SDG objectives.

Removed(4) The EU’s approach to sustainable and inclusive growth is anchored in the 20 principles of the European Pillar of Social Rights to ensure a fair transition towards this goal and policies which leave no one behind. Furthermore, the EU social acquis including the Union of Equality Strategies provides standards in the areas of labour law, equality, accessibility, health and safety at work, and anti-discrimination.

Removed(5) Financial markets play a crucial role in the channelling of capital toward investments necessary for the achievement of the Union climate and environmental objectives. In March 2018, the Commission published its Action Plan 'Financing Sustainable Growth', setting up its strategy on sustainable finance. The objectives of that Action Plan are to mainstream sustainability factors into risk management and reorient capital flows towards sustainable investment to achieve sustainable and inclusive growth.

Removed(6) As part of the Action Plan, the Commission commissioned a study entitled “Study on Sustainability Related Ratings, Data and Research” to take stock of the developments in the sustainability-related products and services market, identify the main market participants and highlight potential shortcomings. That study provided an inventory and classification of market actors, sustainability products and services available in the market and an analysis of the use and perceived quality of sustainability-related products and services by market participants. The study highlighted the existence of conflicts of interest, the lack of transparency and accuracy of Environmental, Social and Governance (‘ESG’) ratings methodologies and the lack of clarity over the terminology and the operations of ESG rating providers.

Removed(7) In the framework of the European Green Deal, the Commission put forward a renewed sustainable strategy. The renewed sustainable finance strategy was adopted on 6 July 2021.

Removed(8) As a follow-up, the Commission announced in the renewed sustainable finance strategy, a public consultation on ESG ratings to feed into an impact assessment. In the public consultation that took place in 2022, stakeholders confirmed concerns with the lack of transparency of ESG ratings methodologies and objectives and clarity over ESG rating activities. As trust is pivotal in the functioning of financial markets, such lack of transparency and reliability of ESG ratings should be urgently addressed.

Removed(9) At international level, the International Organization of Securities Commissions (‘IOSCO’) has issued a report in November 2021 containing a set of recommendations on ESG ratings providers.

Removed(10) ESG ratings play an important role in global capital markets, as investors, borrowers and issuers increasingly use those ESG ratings as part of making informed, sustainable investment and financing decisions. Credit institutions, investment firms, insurance undertakings, assurance undertakings, and reinsurance undertakings, amongst others, often use those ESG ratings as a reference for the sustainability performance or for the sustainability risks and opportunities in their investment activity. Consequently, ESG ratings have a significant impact on the operation of the markets and on the trust and confidence of investors and consumers. To ensure that ESG ratings used in the Union are independent, comparable and of adequate quality, it is important that ESG rating activities are conducted in accordance with the principles of integrity, transparency, responsibility, and good governance as well as with core concepts of Union law. Better comparability and increased reliability of ESG ratings would enhance the efficiency of that fast-growing market, thereby facilitating progress towards the objectives of the Green Deal.

Removed(11) ESG ratings play an enabling role for the proper functioning of the Union sustainable finance market by providing important information for investment strategies, risk management and disclosure obligations by investors and financial institutions. It is therefore necessary to ensure that ESG ratings provide material decision-useful information to the users, and that users of ESG ratings better understand the objectives which ESG ratings pursue and what specific issues and metrics those ratings measure.

Removed(12) It is necessary to acknowledge the various business models of the ESG rating market. A first business model is the user-paid model, where users are mainly investors that purchase ESG ratings for investment decisions. A second business model is the issuer-pay model, where undertakings purchase ESG ratings for assessing risks and opportunities with their operations.

Removed(13) Member States neither regulate nor supervise the activities of ESG rating providers or the conditions for the provision of ESG ratings. In ensuring alignment with the objectives of the SDGs and the European Green Deal, and given the existing divergences, lack of transparency and absence of common rules, it is likely that Member States would adopt diverging measures and approaches, which would have a direct negative impact on, and create obstacles to, the proper functioning of the internal market, and be detrimental to the ESG rating market. ESG rating providers issuing ESG ratings for the use of financial institutions and undertakings in the Union would be subject to different rules in different Member States. Divergent standards and market practices would make it difficult to have clarity over the construction of ESG ratings and allow for their comparison, thus creating uneven market conditions for users, causing additional barriers within the internal market, and risking distorting investment decisions.

Removed(14) This Regulation complements the existing EU sustainable finance framework. Ultimately, ESG ratings should facilitate information flows in order to facilitate investment decisions.

Removed(15) Rules on ESG rating providers should not apply to private ESG ratings produced pursuant to an individual order and provided exclusively to the person who placed the order and which are not intended for public disclosure or distribution by subscription or other means. Neither should such rules apply to ESG ratings produced by European financial undertakings that are used exclusively for internal purposes or shared within their group. ESMA should develop draft regulatory standards to strictly delineate what constitutes an internal use. To preserve the level playing field, ESMA should ensure that the exclusion does not apply to ESG ratings provided by a financial undertaking to other parties, other than in the case of certain disclosures under Regulation (EU) 2019/2088 of the European Parliament and of the Council and Regulation (EU) 2020/852 of the European Parliament and of the Council. ESG ratings developed by European or national authorities ▐should also be exempted from such rules. Such rules should not apply to the provision of ESG data that do not include an element of rating or scoring and are not subject to any modelling or analysis resulting in the development of an ESG rating.

Removed(15a) Rules on ESG rating providers should in principle not apply to ratings produced by members of the European System of Central Banks (ESCB). That is because it is necessary to ensure that this Regulation does not unintentionally have an impact on measures of the ESCB that seek to take climate considerations into account in the ESCB’s monetary policy collateral framework when pursuing its primary objective of maintaining price stability and supporting the general economic policies in the Union.

Removed(15b) Non-profit civil society organisations that compile scoreboards or rankings for non-commercial purposes and that make those rankings accessible free of charge, should not be deemed to fall within the scope of this Regulation. However, they should endeavour to integrate the transparency requirements laid down in this Regulation where applicable.

Removed(15c) To assess the ESG profile of companies, and as part of their sustainable investment and financing decisions processes, credit institutions, investment firms, insurance undertakings, and reinsurance undertakings, amongst others, rely both on external ESG ratings and on external ESG data products. Financial institutions should bear responsibility in the case of greenwashing accusations concerning their financial products, while the distribution of ESG information on entities or financial products, relying on proprietary or established methodology, which includes, among others, data sets on emissions and data on controversies, should not be covered by this Regulation. The Commission should carry out a review of this Regulation that assesses whether the scope identified is sufficient to ensure the confidence of investors and consumers in the sustainability performance of financial products and services and, where needed, envisages broadening the set of ESG data products and ESG data products providers covered by this Regulation.

Removed(16) It is important to lay down rules ensuring that ESG ratings provided by ESG rating providers authorised in the Union are of adequate quality, are subject to appropriate requirements, recognising the existence of different business models, and ensure market integrity. Those rules would apply to overall ESG ratings capturing Environmental, Social and Governance factors, and to ratings that are only looking at a single Environmental, Social or Governance factor or sub-component of that factor. Separate environmental (E), social (S) and governance (G) ratings should be provided rather than a single ESG metric that aggregates E, S and G factors. If ESG rating providers nevertheless decide to provide aggregated ratings, they should disclose and justify the rate and weight granted to each component (E, S and G), which should be based on the same scale in order to ensure that each E, S and G category can be compared with the other ones.

Removed(17) Given the use of ESG ratings from providers located outside the Union, it is necessary to introduce requirements based on which third-country ESG rating providers may offer their services in the Union. This is necessary to ensure market integrity, investor protection and proper enforcement. There should also be an objective reason why a third country ESG rating provider needs to provide the ESG rating and why that ESG rating needs to be endorsed for use in the Union. Therefore, three possible regimes are proposed for those third countries ESG rating providers: equivalence, endorsement and recognition. As an overarching principle, supervision and regulation in a third country should be equivalent to Union supervision and regulation of ESG ratings. Therefore, ESG ratings provided by an ESG rating provider located in a third country can only be offered in the Union where a positive decision on equivalence of the third-country regime has been taken by the Commission. In order to benefit from the Union’s equivalent regulatory and supervisory regime, third-country ESG rating providers should be legally established and authorised or registered in a third country. However, to avoid any adverse impact resulting from a possible abrupt cessation of the offering in the Union of ESG ratings provided by a third country ESG rating provider, it is also necessary to provide for certain other mechanisms, that is endorsement and recognition. Any ESG rating provider with a group structure should be able to use the mechanism of endorsement for the ESG ratings developed outside the Union, provided they establish, within the group, an authorised ESG rating provider in the Union. Smaller ESG rating providers, within the meaning of the maximum threshold of net turnover to define small undertakings in Directive 2013/34/EU, that generally do not belong to a group, and may not have the means to have a legal entity authorised in the Union, should be able to continue or start offering their services in the Union and should therefore benefit from a lighter regime, that is recognition. Where the third country ESG provider is subject to supervision, appropriate cooperation arrangements should be put in place in order to ensure the proper exchange of information with the relevant competent authority of the third country.

Removed(18) To ensure a high level of investor and consumer confidence in the internal market, ESG rating providers which provide ESG ratings in the Union should be authorised. It is therefore necessary to lay down harmonised conditions for such authorisation and the procedure for the granting, suspension and withdrawal of such authorisation.

Removed(19) To ensure a high level of information to investors and other users of ESG ratings, information on ESG ratings and ESG rating providers should be made available on the European Single Access Point (ESAP). ESAP should provide the public with an easy centralised access to such information.