Changes from report parliamentary committee draft to plenary report

RemovedEXPLANATORY STATEMENT

Added– (xvi) a payment institution as defined in Article 1(1), point (d), of Directive (EU) 2015/2366 of the European Parliament and of the Council;

RemovedThe debate surrounding ESG ((Environment, Social, Governance) ratings and its excesses reminds us of the need to implement a clear and sound framework for ESG criteria and their providers, in order for them to become a useful tool for redirecting investment towards more sustainable companies and projects.

Added– (xvii) an electronic money institution as defined in Article 2, point (1), of Directive 2009/110/EC of the European Parliament and of the Council;

RemovedIn this regard, the European Commission's proposal for the regulation of ESG ratings providers is therefore timely. It aims to introduce a set of common rules for these essential actors in responsible investment.

Added– (xviii) a crowdfunding service provider as defined in Article 2(1), point (e), of Regulation (EU) 2020/1503 of the European Parliament and of the Council;

RemovedThe primary mission of ESG assessment is to provide investors with information about a company’s extra-financial performance in environmental, social and governance matters. Today, most of this mission consists of assessing the risks and opportunities related to environmental and social transformations, particularly on the company’s accounts. This is what we call financial materiality. However, such an approach completely ignores the impact of the company’s activities on the environment and society: the impact materiality. Those two approaches lead to different methodologies and, ipso facto, different results when assessing a company’s performance.

Added– (xix) a crypto-asset service provider as defined in Article 3(1), point (8), of [the proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets] where performing one or more crypto-asset services as defined in Article 3(1), point (9), of [the proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets];

RemovedFurthermore, the UN Principles for Responsible Investment's initiative have garnered support from over 3,000 signatories representing assets under management exceeding EUR 100 trillion. This widespread adoption presents the risk of mis-selling and greenwashing if ESG data lacks standardized and harmonized criteria. Therefore, ensuring accurate and reliable ESG information is key.

Added– (xx) a trade repository as defined in Article 2, point (2), of Regulation (EU) No 648/2012;

RemovedWhile your Rapporteur keeps the non-interference clause suggested by the Commission as regards to the methodologies used by rating agencies, the disclosure requirements in the Regulation should be more stringent and instructive. It should at all times be clear what types of materiality are considered and whether the rating is referring to absolute or relative performance. Rating providers should also refrain from aggregating the E, S and G scores, as this could obscure poor performance on any of these individual metrics. For each of these metrics, some high level minimum disclosure requirements are proposed referring to relevant international norms and standards. Furthermore, rating providers should clearly communicate about the limitations their ratings might have.

Added– (xxi) a securitisation repository as defined in Article 2, point (23), of Regulation (EU) 2017/2402;

RemovedEncouraging competition among ESG rating providers and fostering an environment where smaller rating providers can enter the market is essential. Consolidation within the industry can lead to higher prices, barriers to entry, reduced competition, limited innovation, decreased geographical diversity in providers, and inadequate coverage of smaller issuers. Entities seeking multiple ratings should prioritize at least one provider with a market share below 5% to ensure diversity and competitiveness in the marketplace.

Added– (xxii) an administrator of benchmarks as defined in Article 3(1), point (3), of Regulation (EU) 2016/1011 of the European Parliament and of the Council ;

RemovedFurthermore, the Rapporteur seeks to strengthen provisions regarding avoidance of conflict of interest and authorisation and use of ratings from third countries

Added– (xxiii) a credit rating agency as defined in Article 3(1), point (b), of Regulation (EC) No 1060/2009;

RemovedSeveral landmark legislative initiatives, including the Sustainable Finance Disclosure Regulation, the Taxonomy Regulation, and the Corporate Sustainability Reporting Directive, have been introduced to improve the availability, quality, and consistency of ESG requirements throughout the financial market value chain. These public initiatives have reduced gaps in data availability and comparability. ESG rating providers should actively incorporate this standardized data into their assessments.

Added(6) ‘rating analyst’ means a person who performs analytical functions for the purpose of issuing ESG ratings 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;

RemovedIn their pursuit of evaluating companies' ESG profiles and making sustainable investment and financing decisions, various financial institutions such as credit institutions, investment firms, insurance undertakings, assurance undertakings, and reinsurance undertakings rely on both external ESG ratings and external ESG data products. However, it's crucial to note that financial institutions bear responsibility in cases of greenwashing accusations related to their financial products. In contrast, the distribution of ESG information across entities or financial products, which depends on proprietary or established methodologies, including datasets covering emissions and controversies, falls outside the purview of the proposed regulation.

Added(7) ‘rated entity’ means a legal person, a financial instrument, a financial product or a public authority or a body governed by public law which is explicitly or implicitly rated in the ESG rating or score, irrespective of whether such rating has been requested for and irrespective of whether the legal person has provided information for that ESG rating or score;

RemovedAnother key issue, recognised by the European Commission itself, is that the ESG ratings market currently suffers from a lack of transparency, with some companies producing useful, reliable evaluations, while others remain opaque and even misleading. For this reason, we need to improve the reliability and transparency of ESG ratings activities.

Added(8) ‘user’ means a natural or legal person, including a public authority or a body governed by public law, to which an ESG rating is provided;

RemovedWe also need to clarify the objectives of the rating providers. ESG analysts too often limit themselves to assessing financial materiality. But a complete and relevant evaluation cannot spare analysing the consequences of the company’s activity on the rest of society.

Added(9) ‘competent authorities’ means the authorities designated by each Member State for the purposes of this Regulation;

RemovedIn summary, these elements underscore the importance of regulating ESG ratings providers and promoting transparency, reliability, and competition in the industry. These changes may seem technical but they are in fact absolutely essential if we want ESG criteria to finally be properly used and useful to all : one important, yet insufficient on its own, tool for the ecological transition and the European Green Deal.

Added(9a) ‘management body’ means an ESG rating provider’s body or bodies which are empowered to define the ESG rating provider’s strategy and objectives and which are responsible for overseeing and monitoring the ESG rating provider’s activities;

Added(10) ‘senior management’ means the person or persons who effectively run the business of the ESG rating provider and the member or members of the ESG rating provider’s administrative or supervisory board.

Added(11) ‘group of ESG rating providers' means a group of undertakings established in the Union consisting of a parent undertaking and its subsidiaries within the meaning of Article 2 of Directive 2013/34/EU, and undertakings linked to each other by a relationship and whose occupation includes the provision of ESG ratings.

AddedProvision of ESG ratings in the Union

AddedRequirements to provide ESG ratings in the Union

AddedAny legal person who wishes to provide ESG ratings in the Union shall be subject to either of the following:

Added(a) an authorisation issued by ESMA as referred to in Article 5;

Added(b) an implementing decision as referred to in Article 9;

Added(c) an authorisation for endorsement as referred to in Article 10.

Added(d) a recognition as referred to in Article 11;

AddedAuthorisation to provide ESG ratings in the Union

AddedApplication for an authorisation to provide an ESG rating

Added1. Legal persons established in the Union that wish to provide ESG ratings in the Union shall apply for authorisation to ESMA.

Added2. The application for authorisation shall contain all of the information listed in Annex I and shall be submitted in any of the official languages of the Union. Council Regulation No 1 shall apply mutatis mutandis to any other communication between ESMA and the ESG rating providers and their staff.

Added3. ESMA shall develop draft regulatory technical standards to specify further the information listed in Annex I.

AddedESMA shall submit those draft regulatory technical standards to the Commission by... [9 months from the date of entry into force of this Regulation].

AddedPower is delegated to the Commission to adopt 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) No 1095/2010.

Added4. An authorised ESG rating provider shall comply with the conditions for initial authorisation at all times.

Added5. ESG rating providers shall notify ESMA of any material changes to the conditions for initial authorisation, including any opening or closing of a branch within the Union, without undue delay.

Added5a. ESMA shall develop draft regulatory technical standards to specify what is considered to constitute a material change as referred to in paragraph 5. ESMA shall submit those draft regulatory technical standards to the Commission by XX XXXX XXXX.

AddedPower 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) No 1095/2010.

AddedExamination of the application for authorisation of ESG rating providers by ESMA

Added1. Within 20 working days of receipt of the application referred to in Article 5(2), ESMA shall assess whether the application is complete. Where the application is not complete, ESMA shall set a deadline by which the applicant is to provide additional information.

Added2. After having assessed whether an application is complete, ESMA shall notify the applicant of the result of that assessment.

Added3. Within 90 working days of the notification referred to in paragraph 2, ESMA shall adopt a fully reasoned decision to authorise or refuse authorisation.

Added4. ESMA may extend the period referred to in the paragraph 3 to 100 working days in particular where the applicant:

Added(a) envisages endorsing ESG ratings as referred to in Article 10;

Added(b) envisages using outsourcing; or

Added(c) requests exemption from compliance in accordance with Article 20.

Added5. The decision adopted by ESMA pursuant to paragraph 3 shall take effect on the fifth working day following its adoption.

Added5a. If no decision is adopted by ESMA within the period referred to in paragraph 3 or 4, as applicable, the applicant shall not be considered authorised to provide ESG ratings in the Union.

AddedDecision to grant or to refuse the authorisation to provide ESG ratings and notification of that decision

Added1. ESMA shall authorise the applicant as ESG rating provider where it concludes from the examination of the application referred to in Article 6 that the applicant complies with the conditions for the provision of ratings set out in this Regulation.

Added2. ESMA shall inform the applicant within five working days of that decision referred to in the first paragraph.

Added3. ESMA shall inform the Commission, the EBA and EIOPA of any decision taken pursuant to paragraph 2.