Common rules and more supervision of ESG ratings in the Union

Sustainability rating, it's changing. The new legislative framework at EU level for assessing the profile of a company or financial instrument according to ESG principles is almost in the home straight. The regulation that aims to increase transparency and integrity - proposed by the European Commission in June 2023 - will most likely land on the table of the EU Council between October and November for the final go-ahead, after a further passage through the European Parliament.

The new rules give Esma, the European Consob, a key role: it will have to authorise ESG rating providers and will be able to carry out audits and inspections. Not only that. Sustainability rating agencies will have to publish details of the methodology used on their websites or in information brochures. It will be possible to provide separate E (environmental factors), S (social) and G (governance) ratings. If instead a single rating is chosen, the weighting of E, S and G factors will have to be clear for each of them. And there will be a less stringent, temporary and optional three-year registration regime for small companies and groups providing ESG ratings. A clear separation between rating and commercial activities is also required. Agencies based abroad will only be able to operate in the EU if they receive endorsement from a European counterpart, are recognised on the basis of quantitative criteria, or if Esma decides to include them in the European register of ESG rating providers.

According to Ada Rosa Balzan, founder, president and CEO of Arb Sb, a consulting company on sustainability issues, the measures under discussion have some strong points. "First of all," she explains, "greater transparency on the activities of ESG rating providers, particularly with regard to the methodology used and the sources of information. This will facilitate comparability between the different ratings offered on the market'. The other strong point is "greater reliability" thanks to the role of Esma "which will make it possible to increase investor confidence: the Authority will publish the list of ESG rating providers annually on its website, indicating their total market share in the Union". However, some knots remain to be unravelled. The new rules under discussion, Balzan emphasises, 'do not, for example, prescribe minimum requirements that ESG ratings should have in order to be distributed in the EU. This poses a problem of comparability that could have been solved by creating a single rating for all, with common standards, as was the case for the directive on sustainability reports, the CSRD". Another open question concerns the issue of dual materiality: 'Most agencies that produce ESG ratings,' Balzan points out, 'simply assign a score based on the financial impact that environmental or social factors may have on the company ("outside in") without looking at the impact that the company may have on environmental and social factors ("inside out"). Finally, because of the way they are constructed, these ratings tend to systematically penalise smaller companies: an important issue in countries where the industrial base is mostly made up of SMEs, such as Italy'.

Once approved and published in the European Official Journal, the regulation will be applicable after 18 months.