Changes from report parliamentary committee draft to plenary report

RemovedArticle 3 – paragraph 1 – point 6: (6) ‘rating analyst’ means a person who performs analytical functions on an ESG profile or characteristics, exposure to ESG risks, or the impact of an entity, financial instrument, company or financial product on people, society and the environment ;

Added(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.

RemovedArticle 6 – paragraph 5 a (new): 5a. If no decision is adopted by ESMA within the period referred to in paragraph 3 or4, as applicable, the applicant shall not be considered authorised to provide ESG ratings in the Union.

Added(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.

RemovedArticle 9 – paragraph 2 – subparagraph 2: For the purposes of point (a), the Commission shall take into account whether the legal framework and supervisory practice of a third country ensures compliance with the IOSCO recommendations for ESG Ratings published in November 2021. Compliance with those recommendations does not in itself constitute equivalence.

Added(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.

RemovedArticle 9 – paragraph 4 – point a: (a) the mechanism for exchanging information between ESMA and the competent authorities of third countries concerned, including access to all relevant information requested by ESMA regarding the ESG rating provider authorised and registered in that third country;

Added(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.

RemovedArticle 9 – paragraph 4 – point b: (b) the mechanism for prompt notification to ESMA where a third country competent authority deems that the ESG rating provider authorised and registered in that third country and that is supervised by that third country competent authority is breaching the conditions of its authorisation or registration, or other national law in that third country;

Added(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.

RemovedArticle 10 – paragraph 1 – subparagraph 1 – point a a (new): (aa) the ESG rating provider located in the Union fulfils the indicators of minimum substance set out in Article 7(1) of Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU;

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

RemovedArticle 10 – paragraph 1 – subparagraph 1 – point a b (new): (ab) the endorsement of the ESG rating does not impair the quality of the assessment of the rated entity or the arrangement of on-site reviews or inspections, if provided for in the ESG rating methodology used by the ESG rating provider;

Added(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.

RemovedArticle 10 – paragraph 1 – subparagraph 2: For the purposes of point (b) of the first subparagraph, ESMA shall examine compliance with the requirements of this Regulation, particularly those of Article 5 and Articles 14 to 25.

Added(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.

RemovedArticle 11 – paragraph 2 – subparagraph 1: Third country ESG rating providers that wish to be recognised as referred to in paragraph 1 shall comply with the requirements established in this Regulation and apply for recognition to ESMA.

Added(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.

RemovedArticle 14 – paragraph 5: 5. ESG rating providers shall adopt and implement internal due diligence policies and procedures that ensure that their business interests and remuneration policies do not impair the independence or accuracy of the assessment activities.

Added(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.

RemovedArticle 14 – paragraph 12: deleted / (deleted)

Added(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.

RemovedArticle 15 – paragraph 1 a (new): 1a. Entities that are part of a group to which an ESG rating provider belongs shall not provide any of the following activities to rated entities: / (a) consulting activities; / (b) audit activities. / Those entities may provide activities to rated entities other than those referred to in paragraph 1a to the extent that appropriate safeguards are in place to prevent conflicts of interest, including measures referred to in Articles 23 and 24 of this Regulation.

Added(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.

RemovedArticle 15 – paragraph 1 b (new): 1b. Employees of ESG rating providers involved in the assessment process of an entity shall not provide any of the activities referred to in paragraph 1.

Added(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.

RemovedArticle 15 – paragraph 2 a (new): 2a. ESMA shall develop draft regulatory technical standards to specify the details of the safeguards to be implemented pursuant to paragraph 1b. / When developing the draft regulatory technical standards referred to in the first subparagraph, ESMA shall take into account the potential conflicts of interest for the provision of ESG ratings and credit ratings that could arise between the rated entity and the rating entity as well as between their employees. / ESMA shall submit the draft regulatory technical standards referred to in the first subparagraph to the Commission by XX XX XXXX. / Power is delegated to the Commission to supplement this Regulation by adopting the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 and (EU) No 1095/2010.

Added(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.

RemovedArticle 16 – paragraph 3: 3. The persons referred to in paragraph 1 shall not buy or sell any financial instrument issued, guaranteed, or otherwise supported by any rated entity or any entity within the group of the rated entity, other than holdings in diversified collective investment schemes, including managed funds, nor engage in any transaction in such financial instruments.

Added(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.

RemovedArticle 16 – paragraph 4 – point c: (c) have had a recent employment, business or other relationship with the rated entity, or any entity within the group of the rated entity, within a period of at least three years, that may cause or may be generally perceived as causing a conflict of interest.

Added(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.

RemovedArticle 16 – paragraph 8: 8. Persons as referred to in paragraph 1 shall not take up a position within a rated entity which they have been involved in rating for one year after the provision of such rating.

Added(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.

RemovedArticle 16 – paragraph 8 a (new): 8a. ESG rating providers shall ensure that, when carrying out an assessment, the persons referred to in paragraph 1 shall be independent of the rated entity and shall not be involved in the decision-taking of the rated entity during the period of the assessment leading to the issuance of an ESG rating and for one year thereafter. / ESG rating providers shall take all reasonable steps to ensure that, when the persons referred to in paragraph 1 participate in or otherwise influence the determination of an ESG rating of any rated entity, their independence is not affected by any existing or potential conflict of interest or business or other direct or indirect relationship involving those persons. / The persons referred to in paragraph 1 shall not participate in or otherwise influence the determination of an ESG rating of any rated entity if there is any threat of self-review, self-interest, advocacy, familiarity or intimidation created by financial, personal, business, employment or other relationships between those persons and the rated entity as a result of which an objective, reasonable and informed third party, taking into account the safeguards applied, would conclude that those persons’ independence is compromised.

Added(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.

RemovedArticle 16 – paragraph 8 b (new): 8b. The persons referred to in paragraph 1 shall not solicit or accept pecuniary or non-pecuniary gifts or favours from a rated entity unless an objective, reasonable and informed third party would consider the value thereof as trivial or inconsequential.

Added(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.

RemovedArticle 16 – paragraph 8 c (new): 8c. If, during the period in which the persons referred to in paragraph 1 are involved in the assessment activities, a rated entity merges with, or acquires, another entity, the ESG rating provider shall ensure that those persons identify and evaluate any current or recent interests or relationships which, taking into account available safeguards, could compromise those persons’ independence and ability to continue being involved in the assessment activities after the effective date of the merger or acquisition.

Added(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.

RemovedArticle 16 a (new): Article 16a / Use of multiple ESG rating providers / 1. Where an entity seeks an ESG rating from at least two ESG rating providers, it shall appoint at least one ESG rating provider with no more than 5 % market share in the Union. / 2. ESMA shall annually publish on its website a list of ESG rating providers listed in the register referred to in Article 13(1), indicating their total market share in the Union. / 3. For the purposes of this Article, total market share shall be measured by reference to the annual turnover generated from ESG rating activities and ancillary services, at group level in the Union.

Added(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%.

RemovedArticle 17 – paragraph 1: 1. ESG rating providers shall record their ESG rating activities. Those records shall contain the information listed in Annexes I and II.

Added(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.

RemovedArticle 18 – paragraph 1 a (new): 1a. The complaint procedures referred to in paragraph 1 shall be open and accessible, and shall include the possibility for anonymous complaints.

Added(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.

RemovedArticle 18 – paragraph 2 – point a – point 1 a (new): (1a) the reliability of the information published in accordance with Annex III;

Added(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.

RemovedArticle 21 – paragraph 1: 1. ESG rating providers shall disclose on their website the methodologies, models and key rating assumptions they use in their ESG rating activities, including the information referred to in Annex III.

Added(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.

RemovedArticle 21 – paragraph 1 a (new): 1a. Separate E, S and G ratings shall be provided rather than a single ESG metric that aggregates E, S and G factors. ESG rating providers shall provide the disclosures referred to in this Article and in Article 22 separately for each factor.

Added(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.

RemovedArticle 21 – paragraph 2: 2. ESMA shall develop draft regulatory technical standards to specify further the elements that are to be disclosed in accordance with paragraph 1 and the presentation of information.

Added(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.

RemovedArticle 21 – paragraph 3 – subparagraph 1: ESMA shall submit those draft regulatory technical standards to the Commission ... [6 months after the date of entry into force of this Regulation].

Added(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.

RemovedArticle 21 – paragraph 3 – subparagraph 2 a (new): The ESG rating provider shall provide the information referred to in Annex III as soon as it has been authorised or recognised pursuant to this Regulation. The ESG rating provider shall make the changes needed following the entry into force of the regulatory technical standards referred to in the second subparagraph of this paragraph.

Added(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.

RemovedArticle 22 – title: Disclosures to users of ESG ratings, subscribers of ESG ratings and rated entities

Added(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.