Changes from plenary report to adopted text

Removed(20) To ensure the quality and reliability of ESG ratings, ESG rating providers should use rating methodologies that are rigorous, systematic, independent, continuous and subject to justification. As a matter of principle, ESG rating providers are encouraged to address the material impact of the rated entity on the environment and on society in general. ESG rating providers should review ESG ratings methodologies on an on-going basis and at least annually taking into account European and international developments affecting the E, S or G factors. However, it is key to leave it to the ESG rating providers themselves to determine their own methodologies in accordance with those principles.

Removed(21) To ensure a higher-level transparency, ESG rating providers should disclose information to the public on the methodologies, models and key rating assumptions which those providers use in their ESG rating activities and in each of their ESG ratings product. In light of the uses of ESG ratings by investors, the rating products should explicitly disclose which dimension of the double materiality the rating addresses, whether the rating addresses both material financial risk to the rated entity and the material impact of the rated entity on the environment and society in general or whether it takes into account only the material impact of the rated entity on the environment and on society in general. They should also explicitly disclose whether the rating addresses other dimensions. For the same reason, ESG rating providers should provide more detailed information on the methodologies, models and key rating assumptions to subscribers of ESG ratings. That information should enable users of ESG ratings to perform their own due diligence when assessing whether to rely or not on those ESG ratings. In particular, ESG rating providers should disclose whether they have taken into account E, S, or G factors, or an aggregation thereof, the rating given to each relevant factor, and the weighting each of those factors is given in the aggregation. ESG rating providers should also disclose the limitations of the information available to them, including information about engagement with the various stakeholders of a rated entity and how contradictory, incomplete or subjective information is handled. (21a) Taking into account the Union objectives and international standards for each factor is recommended to ensure a sufficient level of quality of ESG ratings. As such, ESG ratings providers should provide information on whether the rating considers, amongst others, the alignment with the objectives set in the Paris Agreement adopted under the United Nations Framework Convention on Climate Change on 12 December 2015 (the ‘Paris Agreement’) for the E factor, the compliance with International Labour Organisation core conventions on the right to organise and collective bargaining for the S factor, and the alignment with international standards on tax evasion and avoidance for the G factor.

Removed(21b) Regulation (EU) 2019/2088, Regulation (EU) 2020/852 and Directive (EU) 2022/2464 of the European Parliament and of the Council represent landmark legislative initiatives to enhance the availability, quality and consistency of ESG requirements across the entire value chain of financial market participants, which should contribute to the continuous improvement of the quality of ESG ratings.

Removed(21c) This Regulation should not interfere with the ESG rating methodologies or content. Diversity in the methodologies of ESG rating providers ensures that the broad requirements of users can be met and promotes competition in the market.

Removed(21d) Whilst an ESG rating provider may use alignment with the taxonomy set out in Regulation (EU) 2020/852 as a relevant factor or key performance indicator (KPI) in its rating methodology, ratings within the scope of this Regulation should not be considered as ESG labels indicating or providing assurance of compliance or alignment with Regulation (EU) 2020/852 or with any other standards.

Removed(22) ESG rating providers should ensure that they provide ESG ratings that are independent, objective and of adequate quality. It is important to introduce organisational requirements ensuring the prevention and mitigation of potential conflicts of interests. To ensure their independence, ESG rating providers should avoid situations of conflict of interest and manage those conflicts adequately where they are unavoidable. ESG rating providers should disclose conflicts of interest in a timely manner. They should also keep records of all significant threats to the independence of the ESG rating provider and that of its employees and other persons involved in the rating process, and the safeguards applied to mitigate those threats. In addition, to avoid potential conflicts of interest, ESG rating providers should not be allowed to offer a number of other services including consulting services, credit ratings, benchmarks or audit▐ activities. Furthermore, ESG rating providers providing banking, insurance and reinsurance or investment activities, as well as entities that are part of a group to which an ESG rating provider belongs, should take appropriate measures to prevent conflicts of interest. Finally, to prevent, identify, eliminate or manage and disclose any conflicts of interest and ensure the quality, integrity and thoroughness of the ESG rating and review process at all times, ESG rating providers should establish appropriate internal policies and procedures in relation to employees and other persons involved in the rating process. Such policies and procedures should, in particular, include internal control mechanisms and a compliance function.

Removed(22a) Competition among ESG rating providers and an environment in which small ESG rating providers can enter the market are key, as concentration among providers can result in higher prices, barriers to entry, lower competition, reduced innovation, less geographical diversity in providers and poor coverage of smaller issuers. Entities that seek more than one ESG rating should therefore consider choosing at least one ESG rating provider with a market share below 15%.

Removed(23) To bring more clarity and to enhance trust on the operations of ESG rating providers, it is necessary to lay down requirements for ongoing supervision of ESG rating providers at Union level. To ensure a level playing field in terms of on-going supervision and to eliminate the risk of regulatory arbitrage across Member States, the European Securities and Markets Authority (ESMA) should be entrusted with the exclusive responsibility for such authorisation and supervision. At the same time, such exclusive responsibility should optimise the allocation of supervisory resources at Union level, thus making ESMA the centre of supervision.

Removed(23a) Aside from their use in the financial services sector, ESG rating assessments are also used in the procurement and supply chain context. Therefore, ESMA should take account of the distinction between ESG rating providers in the financial sectors and those in non-financial sectors in its supervision of ESG rating providers.

Removed(24) ESMA should be able to require all information necessary to carry out its supervisory tasks effectively. It should therefore be able to demand such information from ESG rating providers, persons involved in ESG rating activities, rated entities and third parties to whom the ESG rating providers have outsourced operational functions and persons otherwise closely and substantially related or connected to ESG rating providers or ESG rating activities.

Removed(25) ESMA should be able to perform its supervisory tasks, and in particular to compel ESG rating providers to end an infringement, to supply complete and correct information, or to comply with an investigation or an on-site inspection. To ensure that ESMA is able to perform those supervisory tasks, ESMA should be able to impose penalties or periodic penalty payments.

Removed(26) Given its role to authorise and supervise ESG rating providers, ESMA should develop draft regulatory technical standards that do not involve policy choices for submission to the Commission. ESMA should specify further the information needed for the authorisation of ESG rating providers. The Commission should be empowered to adopt those implementing technical standards by means of delegated acts pursuant to Article 290 TFEU and in accordance with Articles 10 to 14 of Regulation (EU) No 1095/2010 of the European Parliament and of the Council.

Removed(27) In its role to authorise and supervise ESG rating providers, ESMA should be able to charge supervisory fees to supervised entities. Such fees should be paid by the supervised entities.

Removed(28) In order to specify further technical elements of this Regulation, the power to adopt acts in accordance with Article 290 of the Treaty on the Functioning of the European Union should be delegated to the Commission in respect of the specifications of the procedure impose fines or periodic penalty payments, including provisions on rights of defence, temporal provisions, the collection of fines or periodic penalty payments, and detailed rules on the limitation periods for the imposition and enforcement of penalties and the type of fees, the matters for which fees are due, the amount of the fees, and the manner in which those fees are to be paid. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Inter-institutional Agreement of 13 April 2016 on Better Law-Making. In particular, to ensure equal participation in the preparation of delegated acts, the European Parliament and the Council should receive all documents at the same time as Member States’ experts, and their experts should systematically have access to meetings of Commission expert groups dealing with the preparation of delegated acts.

Removed(29) It is necessary to have a number of measures supporting smaller ESG rating providers to enable them to continue their activities, or to enter the market after the date of application of this Regulation. Such measures should include the possibility for ESMA to exempt smaller ESG rating providers from a number of organisational requirements where they meet certain criteria. In addition, a transitional regime should be introduced for the first months following the application of this Regulation, to facilitate the initial phase of application for smaller ESG rating providers. Finally, supervisory fees should be proportionate to the annual net turnover of the ESG ratings provider concerned.

Removed(29a) Where available, a credit rating agency should consider taking into account the ESG rating of the rated entity provided in accordance with this Regulation to define its credit rating.

Removed(30) Since the objectives of this Regulation cannot be sufficiently achieved by the Member States, namely to lay down a consistent and effective regime to address the shortcomings and vulnerabilities that ESG ratings pose, but can rather, by reasons of the scale and effects, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives.

Removed(31) This Regulation should apply without prejudice to the application of Aricles 101 and 102 TFEU,

RemovedHAVE ADOPTED THIS REGULATION

RemovedSUBJECT MATTER, SCOPE AND DEFINITIONS

RemovedSubject-matter

RemovedThis Regulation introduces a common regulatory approach to enhance the integrity, transparency, comparability, responsibility, reliability, alignment with Union law, good governance, and independence of ESG rating activities, contributing to the transparency and quality of ESG ratings. It aims to contribute to the smooth functioning of the internal market, while achieving a high level of consumer and investor protection and preventing greenwashing or other types of misinformation, including social-washing, by introducing transparency and minimum requirements related to ESG ratings and rules on the organisation and conduct of ESG rating providers.

RemovedScope

Removed1. This Regulation applies to ESG ratings issued by ESG rating providers operating in the Union that are disclosed publicly or that are distributed to regulated financial undertakings in the Union, undertakings that fall under the scope of Directive 2013/34/EU of the European Parliament and of the Council, or Union or Member States public authorities.

Removed2. This Regulation does not apply to any of the following:

Removed(a) private ESG ratings which are not intended for public disclosure or for distribution;

Removed(b) ESG ratings produced by regulated financial undertakings in the Union that are used exclusively for internal purposes or for providing in-house financial services and products, including services provided to other entities that are part of the same group as long as the ratings are not disclosed to third parties beyond the group;

Removed(c) the provision of ▐ESG data that do not contain an element of rating or scoring, and is not subject to any modelling or analysis▐;

Removed(d) credit ratings issued pursuant to Regulation (EC) No 1060/2009 of the European Parliament and of the Council and any ESG-related scores or factors that are produced or solely used as components of credit ratings as part of the public methodology for credit ratings;

Removed(e) products or services that incorporate an element of an ESG rating, including content produced by financial analysts within the investment research division of a regulated financial institution;

Removed(f) second-party opinions on sustainable debt instrument, including but not limited to sustainability bonds, social bonds, sustainability-linked bonds, loans and other types of debt instrument, as well as financing frameworks that govern the use of such instruments;

Removed(g) ESG ratings produced by Union or Member States’ public authorities;

Removed(h) ESG ratings from an authorised ESG rating provider that are made available to users by a third party or an affiliate of the authorised ESG rating provider within the same group structure;

Removed(i) ESG ratings produced by members of the European System of Central Banks (ESCB) provided that they are not produced or disseminated for commercial purposes;▐

Removed(ia) mandatory disclosures pursuant to Articles 6, 8, 9, 10 and 11 of Regulation (EU) 2019/2088;

Removed(ib) disclosures pursuant to Articles 5, 6 and 8 of Regulation (EU) 2020/852.

Removed2a. ESMA shall develop draft regulatory technical standards to specify further what is considered to constitute a use exclusively for internal purposes or for providing in-house or intra-group financial services and products in accordance with paragraph 2, point (b).

RemovedESMA shall submit those draft regulatory technical standards to the Commission by [12 months from the entry into force of this Regulation].

RemovedPower is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with the procedure laid down in Articles 10 to 14 of Regulation (EU) 1095/2010.

RemovedDefinitions

RemovedFor the purposes of this Regulation, the following definitions apply:

Removed(1) ‘ESG rating’ means a product marketed as providing an ESG opinion, an ESG score or a combination of both, regarding an entity, a financial instrument, a financial product, or an undertaking’s environmental, social or governance profile or characteristics or exposure to ESG risks or the impact on people, society and the environment, that are based on both an established and transparent methodology and defined ranking system of rating categories and that are marketed to third parties, irrespective of whether such ESG rating is explicitly labelled as ‘rating’ or ‘ESG score’, excluding ESG labels;

Removed(2) ‘ESG opinion’ means an ESG assessment that is based on a rules-based methodology and defined ranking system of rating categories, involving directly a rating analyst in the rating process or systems process;

Removed(3) ‘ESG score’ means an ESG measure derived from data, using a rule-based methodology, and based only on a pre-established statistical or algorithmic system or model, without any additional substantial analytical input from an analyst;

Removed(4) ‘ESG rating provider’ means a legal person whose occupation includes the issuance of ESG ratings ▐

Removed(5) ‘regulated financial undertaking in the Union’ means an undertaking, regardless of its legal form, that is:

Removed– (i) a credit institution as defined in Article 4(1), point (1), of Regulation (EU) No 575/2013 of the European Parliament and of the Council;

Removed– (ii) an investment firm as defined in Article 4(1), point (1), of Directive 2014/65/EU the European Parliament and of the Council;

Removed– (iii) an alternative investment fund manager (AIFM) as defined in Article 4(1), point (b), of Directive 2011/61/EU of the European Parliament and of the Council, including a manager of a qualifying venture capital fund as defined in Article 3, point (c) of Regulation (EU) No 345/2013 of the European Parliament and of the Council, a manager of a qualifying social entrepreneurship fund as defined in Article 3, point (c) of Regulation (EU) No 346/2013 of the European Parliament and of the Council and a manager of the ELTIF as defined in Article 2, point (12) of Regulation (EU) 2015/760 of the European Parliament and of the Council;

Removed– (iv) an undertaking for collective investment in transferable securities (UCITS) management company as defined Article 2(1), point (b), of Directive 2009/65/EC of the European Parliament and of the Council;

Removed– (v) an insurance undertaking as defined in Article 13, point (1), of Directive 2009/138/EC of the European Parliament and of the Council;

Removed– (vi) a reinsurance undertaking as defined in Article 13, point (4), of Directive 2009/138/EC;

Removed– (vii) an institution for occupational retirement provision as defined in Article 1, point (6) of Directive 2016/2341 of the European Parliament and of the Council;

Removed– (viii) pension institutions operating pension schemes which are considered to be social security schemes covered by Regulation (EC) No 883/2004 of the European Parliament and of the Council and Regulation (EC) No 987/2009 of the European Parliament and of the Council, and any legal entity set up for the purpose of investment of such social security schemes;

Removed– (ix) an alternative investment fund (AIF) managed by an AIFM as defined in Article 4(1), point (b), of Directive 2011/61/EU or an AIF supervised under the applicable national law;

Removed– (x) a UCITS as defined in Article 1(2) of Directive 2009/65/EC;

Removed– (xi) a central counterparty as defined in Article 2, point (1), of Regulation (EU) No 648/2012 of the European Parliament and of the Council;

Removed– (xii) a central securities depository as defined in Article 2(1), point (1), of Regulation (EU) No 909/2014 of the European Parliament and of the Council;

Removed– (xiii) an insurance or reinsurance special purpose vehicle authorised in accordance with Article 211 of Directive 2009/138/EC;

Removed– (xiv) a ‘securitisation special purpose entity’ as defined in Article 2, point (2), of Regulation (EU) No 2017/2402 of the European Parliament and of the Council;