In future, providers of sustainability ratings in the EU must report transparently on the methodology they use and the sources they utilise. Conflicts of interest must also be prevented by separating different activities, in particular consulting, auditing and issuing ratings.

Negotiators from the EU Parliament and the EU Council of Ministers recently agreed on corresponding legal regulations. This trilogue compromise must now be confirmed by the two European legislators, i.e. the majority of MEPs and the qualified majority of national governments. The EU regulation will then come into force 18 months later.

With these requirements, the EU is responding to the growing importance of the use of ESG ratings, particularly by investors. "Strengthening investor confidence through transparent ESG ratings can significantly influence our transition to a more socially responsible and sustainable future," said Belgium's Finance Minister Vincent van Peteghem, welcoming the agreement on a joint compromise text.

The EU Commission presented a proposal for a regulation last summer and made it clear at the time that the aim was not to harmonise the methods for calculating ESG ratings. Instead, the aim is to increase transparency regarding the approach taken by rating providers.

The new rules stipulate that the EU securities regulator ESMA will be given the task of authorising and monitoring ESG rating agencies and, if necessary, sanctioning them with orders or fines. The requirements make it clear that ESG ratings include environmental and social aspects as well as human rights and governance criteria, whereby the weighting must be made clear. At the same time, however, the rules also allow separate individual ratings for the environmental, social and governance criteria.

The Council and EU Parliament have also provided for less stringent rules for small providers of ESG ratings. For example, they can be exempted from paying fees to ESMA and also from individual content requirements.

The main point of contention in the final negotiations was the separation of the different activities of the rating providers. "The agreement introduces a fundamental separation of business and activities, whereby ESG rating providers have the option of not establishing a separate legal entity for certain activities, provided that there is a clear separation between the activities, and they take measures to avoid potential conflicts of interest," explains the Council. However, this exemption should not apply to rating providers "carrying out advisory, audit and credit rating activities".