Changes from report parliamentary committee draft to plenary report

AddedSeparation of business and activities

Added1. ESG rating providers shall not provide any of the following activities:

Added(a) consulting activities to investors, or financial or non-financial undertakings;

Added(b) the issuance and distribution of credit ratings;

Added(c) the development of benchmarks by 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;

Added▐(e) audit activities.

Added▐

Added1a. Appropriate measures to prevent conflicts of interest shall be put in place by:

Added(a) ESG rating providers that provide investment activities;

Added(b) ESG rating providers that provide banking, insurance or reinsurance activities;

Added(c) entities that are part of a group to which an ESG rating provider belongs, that provide services referred to in paragraph 1.

AddedAppropriate measures include the measures referred to in Articles 23 and 24.

Added1b. 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.

Added2. ESG rating providers shall ensure that the provision of other services than those referred to in paragraph 1 does not create risks of conflicts of interest within its ESG rating activities.

Added2a. ESMA shall develop draft regulatory technical standards to specify the details of the safeguards to be implemented pursuant to paragraphs 1a and 1b, as well as to specify the conditions under which ESG rating providers could provide other services as referred to in paragraph 2.

AddedWhen 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.

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 Articles 10 to 14 of Regulations (EU) No 1093/2010, (EU) No 1094/2010 and (EU) No 1095/2010.

AddedRating analysts, employees and other persons involved in the provision of ESG ratings

Added1. ESG rating providers shall ensure that rating analysts, employees and any other natural person whose services are placed at its disposal or under its control and who are directly involved in the provision of ESG ratings, including analysts directly involved in the rating process and persons involved in the provision of scores, are appropriately trained and have the knowledge and experience that is necessary for the performance of the duties and tasks assigned, in particular a sufficient understanding of potential material financial risk to the rated entity and potential material impact of the rated entity on the environment and on society in general.

Added2. ESG rating providers shall ensure that the persons referred to in paragraph 1 are not allowed to initiate or participate in negotiations regarding fees or payments with any rated entity or any person directly or indirectly linked to the rated entity by control.

Added3. The persons referred to in paragraph 1, as well as persons occupying a senior management position in the ESG rating provider, 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.

Added4. The persons referred to in paragraph 1 shall not participate in or otherwise influence the determination of an ESG rating of any rated entity where those persons:

Added(a) own financial instruments of the rated entity, other than holdings in diversified collective investment schemes;

Added(b) own financial instruments of any entity related to a rated entity, the ownership of which may cause or may be generally perceived as causing a conflict of interest, other than holdings in diversified collective investment schemes;

Added(c) have had, over the last year an employment, business or other relationship with the rated entity or any entity within the group of the rated entity that may cause or may be generally perceived as causing a conflict of interest.

Added5. ESG rating providers shall ensure that the persons referred to in paragraph 1, as well as persons occupying a senior management position in the ESG rating provider:

Added(a) take all reasonable measures to protect property and records in possession of the ESG rating provider from fraud, theft or misuse, taking into account the nature, scale and complexity of the ESG rating provider’s business and the nature and range of ESG rating activities;

Added(b) do not share confidential information that has been entrusted to the ESG rating provider with anyone who is not directly involved in the provision ofESG rating activities, including rating analysts and employees of any person directly or indirectly linked to the ESG rating provider by control, and any other natural person whose services are or have been placed at the disposal of, or are under the control of, any person directly or indirectly linked to the ESG rating provider by control;

Added(c) do not use or share confidential information for any other purpose than the provision of ESG rating activities, including for the trading of financial instruments.

Added6. Persons as referred to in paragraph 1 that consider that any other person as referred to in paragraph 1 has engaged in conduct that they consider to be illegal shall immediately inform the compliance function thereof. The ESG rating provider shall ensure that such reporting does not have any negative consequences for the person reporting.

Added7. Where a rating analyst terminates his or her employment with the ESG rating provider and, within one year, joins a rated entity which he or she has been involved in rating, the ESG rating provider shall review the work of the rating analyst over one year preceding his or her departure.

Added8. Persons as referred to in paragraph 1, as well as persons occupying a senior management position in the ESG rating provider, shall not take up a senior management position within a rated entity which they have been involved in rating for one year after the provision of such rating.

Added8a. 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 making of the rated entity during the period of the assessment leading to the issuance of an ESG rating and for one year thereafter.

AddedESG 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 relationship involving those persons.

AddedThe 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 evidence 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.

Added8b. 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.

Added8c. 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.

AddedUse of multiple ESG rating providers

Added1. Where an entity or investor seeks an ESG rating from at least two ESG rating providers, it shall consider appointing at least one ESG rating provider with a market share of no more than 15% in the Union.

Added2. ESMA shall publish annually 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.

Added3. 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.

AddedRecord-keeping requirements

Added1. ESG rating providers shall record their ESG rating activities. Those records shall contain the information listed in Annexes I and II.

Added1a. ESG rating providers shall keep a record of key rating-related information, including rating, the rated legal entity or financial instrument, the rating type, the horizon or outlook used for the rating, and the rating status, and make that information available upon request to competent authorities in charge of the supervision of the regulated financial undertakings in the Union.

Added2. ESG rating providers shall keep the information referred to in paragraph 1 for at least five years and in such a form that it is possible to replicate and fully understand the determination of an ESG rating.

AddedComplaints-handling mechanism

Added1. ESG rating providers shall have in place and publish on their website procedures for receiving, investigating and retaining records concerning complaints made.

Added1a. The complaint procedures referred to in paragraph 1 shall be open and accessible, and shall disclose the name of the complainant, unless there are objective grounds for not doing so.

Added2. The procedures referred to in paragraph 1 shall ensure that:

Added(a) the ESG rating provider makes publicly available the complaints-handling policy through which complaints may be submitted on:

Added(1) the sources of data used for a specific ESG rating;

Added(2) the way in which the rating methodology in relation to a specific ESG rating has been applied;

Added(3) whether a specific ESG rating is representative of the rated entity;

Added▐

Added(5) other decisions in relation to the ESG rating that appear inconsistent with the applicable methodologies, policies or procedures of the ESG rating provider;

Added(b) complaints are investigated in a timely and fair manner and that the outcome of the investigation is communicated to the complainant within a reasonable period of time, unless such communication would be contrary to objectives of public policy or to Regulation (EU) No 596/2014 of the European Parliament and of the Council;

Added(c) the inquiry is conducted independently of any personnel that has been involved in the subject-matter of the complaint.

AddedOutsourcing

Added1. Outsourcing of important operational functions shall not materially impair the quality of the ESG rating provider’s internal control and the ability of the European Supervisory and Markets Authority (ESMA) to supervise the ESG rating provider’s compliance with its obligations under this Regulation.

Added2. ESG rating providers that outsource functions or any services or activities that are relevant for the provision of an ESG rating shall remain fully responsible for discharging all of the obligations under this Regulation.