Changes from report parliamentary committee draft to plenary report

DRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION

▸10 unchanged paragraphs

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 – C90203/2023 – 2023/0177(COD))

(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,

– having regard to the opinion of the European Economic and Social Committee of …,

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

Changed– having regard to the opinionletter offrom the Committee on Legal Affairs,

Changed– having regard to the report of the Committee on Economic and Monetary Affairs (A90000/2023),(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

RemovedRecital 1 a (new): (1a) Furthermore, the UN Principles for Responsible Investment have over 3000 signatories representing over EUR 100 trillion of assets under management. That carries a risk of mis-selling and greenwashing if ESG data is not subject to any standards or harmonisation. Accurate and reliable ESG information is therefore key.

AddedAMENDMENTS BY THE EUROPEAN PARLIAMENT*

RemovedRecital 2: (2) The transition to a sustainable economy is key to ensuring 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.

Addedto the Commission proposal

RemovedRecital 3: (3) Achieving SDG objectives in the Union requires the channelling of capital flows towards sustainable investments. It is important 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, 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.

Added---------------------------------------------------------

RemovedRecital 6: (6) As part of the Action Plan, the Commission commissioned a study entitled “Study on Sustainability Related Ratings, Data and Research”23 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 terminology and the operations of ESG rating providers.

Added2023/0177 (COD)

RemovedRecital 9 a (new): (9a) Regulation (EU) 2019/2088 of the European Parliament and of the Council 1a, Regulation (EU) 2020/852 of the European Parliament and of the Council1b and Directive (EU) 2022/2464 of the European Parliament and of the Council1c represent landmark legislative initiatives to enhance the availability, quality and consistency of ESG requirements across the entire value chain of financial market participants. As a result of those public initiatives, there are fewer and fewer gaps in the availability and comparability of data. ESG rating providers should therefore make use of those data. / 1a Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (OJ L 317, 9.12.2019, p. 1). / 1b Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (OJ L 198, 22.6.2020, p. 13). / 1c Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (OJ L 322, 16.12.2022, p. 15).

AddedREGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

RemovedRecital 10: (10) ESG ratings can play an important role in global capital markets in offering a missing link between the demand for, and supply of, sustainable investments. 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, objective 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.

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

RemovedRecital 10 a (new): (10a) To assess the ESG profile of companies, and as part of their sustainable investment and financing decisions processes, credit institutions, investment firms, insurance undertakings, assurance 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. It is important that the Commission carries out a review of this Regulation to assess 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.

Added(Text with EEA relevance)

RemovedRecital 11: deleted

AddedTHE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

RemovedRecital 15: (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 for internal purposes. ESG ratings developed by European or national authorities and by central banks should also be exempted from such rules. Furthermore, non-profit civil society organisations that offer free rating-like services should be excluded from the scope of this Regulation. Finally, 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.

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

RemovedRecital 16: (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 and ensure market integrity. Those rules would apply to overall ESG ratings that consider Environmental, Social or Governance factors or sub-component of those factors. Expressing ESG ratings in the form of a single metric aggregating Environmental, Social and Governance factors is detrimental to the reliability and comparability of the ratings and should not be permitted.

AddedHaving regard to the proposal from the European Commission,

RemovedRecital 16 a (new): (16a) Competition among ESG rating providers and an environment in which small ESG rating providers can enter the market are key as consolidation can produce 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 choose at least one ESG rating provider with a market share below 5%.

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

RemovedRecital 17: (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. 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. Third-country ESG rating providers that can be subject to the Union’s equivalent regulatory and supervisory regime should be legally established, authorised and 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 Un…

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

RemovedRecital 21: (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 it is 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 one of them. 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.

AddedActing in accordance with the ordinary legislative procedure,

RemovedRecital 21 a (new): (21a) Information from the public domain, provided by civil society organisations, trade unions and journalists, is of key importance. However, rated entities might have business activities in jurisdictions where freedom of speech, freedom of assembly and trade union rights are not well respected, which impairs the quality of ESG ratings. ESG rating providers should therefore communicate the limitations of the information available to them.

AddedWhereas:

RemovedRecital 22: (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, investment activities, audit, or banking, insurance and reinsurance activities. Furthermore, entities that are part of a group to which an ESG rating provider belongs should not provide consulting or audit activities to rated entities. 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…

Added(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.

RemovedArticle 1 – paragraph 1: This Regulation introduces a common regulatory approach to enhance the integrity, transparency, responsibility, reliability, harmonisation, alignment with Union law, good governance, independence and quality of ESG rating activities. 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 quality requirements related to ESG ratings and rules on the organisation and conduct of ESG rating providers.

Added(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.

RemovedArticle 2 – paragraph 2 – point b: (b) ESG ratings produced by regulated financial undertakings in the Union that are used for internal purposes or for providing in-house financial services and products, including services to other entities that are part of the same group;

Added(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.

RemovedArticle 2 – paragraph 2 – point i a (new): (ia) the mandatory disclosures pursuant to Articles 6, 8 and 9 of Regulation (EU) 2019/2088;

Added(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.

RemovedArticle 2 – paragraph 2 – point i b (new): (ib) the disclosures pursuant to Articles 5, 6 and 8 of Regulation (EU) 2020/852;

Added(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.

RemovedArticle 2 – paragraph 2 – point i c (new): (ic) non-profit civil society organisations that compile scoreboards or rankings for non-commercial purposes and that make those rankings accessible free of charge;

Added(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.

RemovedArticle 3 – paragraph 1 – point 1: (1) ‘ESG rating’ means an opinion, a score or a combination of both, regarding an entity, a financial instrument, a financial product, or an undertaking’s ESG profile or characteristics or exposure to ESG risks or the impact on people, society and the environment, that are based on an established methodology and defined ranking system of rating categories and that are provided to third parties, irrespective of whether such ESG rating is explicitly labelled as ‘rating’ or ‘ESG score’, excluding ESG labels and controversy ratings;

Added(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.

RemovedArticle 3 – paragraph 1 – point 4: (4) ‘ESG rating providers’ means a legal person whose occupation includes the offering and distribution of ESG ratings;

Added(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.