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ABSTRACT
Step by step the EU is building an impressive road map on Sustainable Finance. After the EU Taxonomy Regulation, the SFDR (Sustainable Finance Disclosure Regulation), the EU Green Bonds Standards, ESG rating activities are the object of all attention. Indeed, ESG ratings play an important role in helping companies and financial institutions integrate sustainability into their decision-making. This proposal of 13 June 2023 for a Regulation on the transparency and integrity of ESG rating activities is therefore an essential component of the general European sustainable finance framework. Impartiality, transparency of methodologies, reliability, comparability, supervision by ESMA, a register of approved providers and the publishing of any sanctions online are the main tools of this text, with the aim of making the European ESG rating market more attractive.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 See, inter alia, F Berg, JF Kölbel and R Rigobon, ‘Aggregate Confusion: The Divergence of ESG Ratings’ (2022) 6 Review of Finance 1315, which pointed out differences in scope, measurement and weighting and proposed a common taxonomy of ESG factors to facilitate the comparison and contrasting of ratings. This study inspired the present proposal for a regulation.
2 COM(2023) 314 final, accompanied by an impact study, see SWD(2023) 204 final. Note, however, that on 9 February 2024, the European Parliament and Council of the EU reached a provisional political agreement on the text of the ESG Ratings Regulation which has made some significant changes to the European Commission's proposal of 13 June 2023.
3 Including the interaction with articles 5 and 6 of the Taxonomy and articles 8 and 9 of the SFDR; on these interactions with CRAs (Credit Rating Agencies), see the impact assessment of this text, Commission Staff Working Document Impact Assessment Report, SWD(2023) 204 final.
4 COM(2023) 314 final, 1, to the extent that it is reasonable to consider that sustainable finance could become part of mainstream finance.
5 ibid.
6 COM(2021) 390 final.
7 Commission Recommendation (EU) 2023/1425 of 27 June 2023 on facilitating finance for the transition to a sustainable economy.
8 ibid, recital 8.
9 Available under https://www.esma.europa.eu/sites/default/files/library/esma_strategy_2023-2028.pdf.
10 European Commission, Directorate-General for Financial Stability, Financial Services and Capital Markets Union, ‘Study on sustainability-related ratings, data and research’(2021) available under https://data.europa.eu/doi/10.2874/14850
11 COM(2023) 314 final, recital 18, at 18.
12 COM(2023) 314 final, recital 13, at 17.
13 See V Fidelle, ‘Le cadre juridique européen de la finance durable’ (2022) RDB et fin 1, sp; No 17, 3.
14 IOSCO, Environmental, Social and Governance (ESG) Rating and Data Products Providers, Final report, https://www.iosco.org/library/pubdocs/pdf/IOSCOPD690.pdf, November 2021.
15 2 June 2022, available under https://www.amf-france.org/fr/actualites-publications/actualites/lamf-renouvelle-son-appel-la-mise-en-place-dune-reglementation-des-fournisseurs-de-donnees-notations.
16 H Bouthinon-Dumas, ‘Les agences de notation extra-financière et le droit’ in H Bouthinon-Dumas et al. (ed.), Finance durable et le droit (Editions IRJS-Sorbonne 2020) p. 147–174.
17 30 EU-based rating providers (3 large, 6 medium, 9 small, 12 very small) and 29 entities based in third countries.
18 SWD(2023) 204 final, 24.
19 Commission Staff Working Document Impact Assessment Report, SWD(2023) 204 final, which stresses the need for a general definition of ESG rating.
20 Annexes to the Proposal for a Regulation of the European Parliament and of the Council on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities, COM(2023) 314 final.
21 See articles 1 and 2.
22 See M Dell’Erba and M Doronzo, ‘Sustainability Gatekeepers: ESG Ratings and Data Providers’ (2023) 25 University of Pennsylvania Journal of Business Law 367.
23 COM(2023) 314 final, article 2(2)(a) to (i).
24 COM(2023) 314 final, article 3(2).
25 COM(2023) 314 final, article 3(4).
26 See COM(2023) 314 final, article 3(5)(iii), which lists all of the organisations concerned (23 in all).
27 COM(2023) 314 final, article 3(7).
28 COM(2023) 314 final, articles 4–8.
29 COM(2023) 314 final, article 5.
30 See Annex 1 on information to be provided in an application for authorisation. Ten points must be completed, including the applicant’s website (a).
31 See COM(2023) 314 final, article 6(1).
32 COM(2023) 314 final, article 7(3).
33 COM(2023) 314 final, article 8, which lists the hypotheses.
34 COM(2023) 314 final, article 8(1)(a).
35 COM(2023) 314 final, articles 9 to 12.
36 COM(2023) 314 final, article 9.
37 COM(2023) 314 final, article 13, see below.
38 COM(2023) 314 final, article 9(2)(a).
39 COM(2023) 314 final, article 9(3) and especially article 9(3)(b) concerning ESMA’s ability to ‘effectively exercise the monitoring responsibilities referred to in Article 33 of Regulation (EU) No 1095/2010’.
40 COM(2023) 314 final, article 10.
41 In compliance with article 7.
42 COM(2023) 314 final, article 10(1)(a) to (f): application to ESMA; monitoring of compliance by the third-country provider with ‘requirements which are at least as stringent as those of this Regulation’; expert appraisal; existence of an ‘objective reason’ that justifies this endorsement and sufficient information to allow it. Where a third-country provider is subject to supervision, a cooperation agreement shall be arranged between ESMA and the competent authority of the third country, to ensure an ‘efficient exchange of information’.
43 COM(2023) 314 final, article 10(3) and 10(4).
44 COM(2023) 314 final, article 10(4).
45 COM(2023) 314 final, article 11.
46 The recognition process is set out in article 11(2).
47 COM(2023) 314 final, article 11(2), the assessment may be carried out either by an independent external auditor or by means of certification by the competent authority of the third country in which the rating provider is located, and see article 11(4).
48 COM(2023) 314 final, article 11(8).
49 COM(2023) 314 final, article 12.
50 COM(2023) 314 final, article 13(2).
51 COM(2023) 314 final, article 13.
52 COM(2023) 314 final, article 13(4).
53 See COM(2023) 314 final, article 13(7), in particular.
54 For example, see COM(2023) 314 final, article 13)(c) ‘for which information a machine-readable format is required and which machine-readable format is to be used’.
55 COM(2023) 314 final, article 14.
56 In the provision, publication and dissemination of their ESG ratings.
57 COM(2023) 314 final, article 14(12) Know-how, intellectual capital and results of innovation likely to be considered as business secrets in general shall not be disclosed.
58 COM(2023) 314 final, article 15.
59 COM(2023) 314 final, article 15(2).
60 COM(2023) 314 final, article 16(1).
61 With the exception of UCITS units.
62 COM(2023) 314 final, article 16(2).
63 COM(2023) 314 final, article 16(4)(c).
64 COM(2023) 314 final, article 16(1).
65 COM(2023) 314 final, article 16(8).
66 Compliance with confidentiality obligations, see COM(2023) 314 final, article 16(5(b), non-competition clause, see article 16(7) and (8).
67 COM(2023) 314 final, article 17.
68 COM(2023) 314 final, article 18.
69 COM(2023) 314 final, article 19.
70 COM(2023) 314 final, article 20(1)(a).
71 COM(2023) 314 final, article 20(2).
72 COM(2023) 314 final, articles 21 and 22.
73 European Single Access Point, which facilitates stakeholders’ access to data.
74 See Annex III(f) ‘in the case of an aggregated ESG rating, weighting of the three overarching ESG factors categories (e.g., 33% Environment, 33% Social, 33% Governance), and the explanation of the weighting method, including weight per individual E, S and G factors’ and (i) ‘where applicable, reference to the use of Artificial Intelligence (AI) in the data collection or rating/scoring process’
75 See the highly instructive paper by Berg, Kölbel and Rigobon (n 1).
76 This is the information referred to in COM(2023) 314 final, Annex III, point 2
77 COM(2023) 314 final, article 23 and 24.
78 COM(2023) 314 final, article 23(1).
79 COM(2023) 314 final, article 23(2).
80 COM(2023) 314 final, article 24.
81 COM(2023) 314 final, articles 26 to 40.
82 COM(2023) 314 final, article 27.
83 COM(2023) 314 final, article 27(4).
84 Under delegations, for example; the Commission will be able to adopt delegated acts to specify the invoicing arrangements.
85 COM(2023) 314 final, article 28.
86 COM(2023) 314 final, article 30(2) (purpose of the request, information requested, deadline, etc.).
87 COM(2023) 314 final, article 30(3(e) specifies ‘the penalty payments’ provided for in the event of the production of the information being ‘incomplete’, (f) indicates the ‘fine’ in the event of ‘inaccurate or misleading’ information, and informs of the right to appeal, see (g).
88 COM(2023) 314 final, article 31, which describes the implementation of these measures; also see article 31(5): if a request for telephone recordings is made, the competent judicial authority under national law shall be consulted, and also to verify that the coercive measures ‘are neither arbitrary nor excessive’, see article 31(6), without being able to call into question the ‘necessity for the investigation’ or ‘demand that it be provided with the information on ESMA’s file’.
89 COM(2023) 314 final, article 32.
90 COM(2023) 314 final, articles 33 to 35.
91 COM(2023) 314 final, article 37.
92 COM(2023) 314 final, article 37.
93 A single fine not exceeding 10% of the supplier’s annual turnover or in the form of a penalty payment, in which case it is calculated on a daily basis and valid until the supervised entity complies, but may not exceed 3% of the entity’s average daily turnover; a periodic fine may not be imposed for a period exceeding six months.
94 ESMA takes into account the nature and seriousness of the infringement from various perspectives (duration and frequency, whether committed deliberately or not, degree of responsibility, impact, previous infringements), see COM(2023) 314 final, article 33(3).
95 According to COM(2023) 314 final, article 33(4), this publication specifies the ESG rating provider’s right to appeal against the decision, the fact that an appeal has been lodged, specifying that it has no suspensive effect, and a statement that ESMA may suspend application of the contested decision
96 COM(2023) 314 final, article 13.
97 COM(2023) 314 final, article 34.
98 COM(2023) 314 final, article 35, of an effective and proportionate nature, see article 35(2)2, for a maximum period of six months from notification of the decision, see article 35(4).
99 Except where such publication would be likely to seriously jeopardise EU financial markets or cause disproportionate damage to the parties involved, see COM(2023) 314 final, article 36(1).
100 COM(2023) 314 final, article 37(1), the rights of defence of persons under investigation are guaranteed, see article 37(5) and (9) on the role of the Commission, and article 38(1) in the event of an ‘urgent action’.
101 COM(2023) 314 final, article 40, to be supplemented by delegated acts.
102 COM(2023) 314 final, article 41.
103 COM(2023) 314 final, article 42.
104 COM(2023) 314 final, article 44.
105 COM(2023) 314 final, article 48.
106 The proposal for a Regulation also provides for a review clause five years after its effective date, and its application is scheduled six months after its entry into force, which will take place 20 days after publication in the OJEU. This proposal for a Regulation will be submitted to the Council under the Spanish Presidency starting on 1 July 2023.
107 See Master Circular for ESG Rating Providers, SEBI (Securities and Exchanges Board of India), 12 July 2023, file:///Users/Kate/Downloads/1689164906428.pdf.
108 See The Draft Voluntary Code of Conduct for ESG Ratings and Date Product Providers, July 2023, https://www.irsg.co.uk/assets/Papers/DRWG-ESG-Code-of-Conduct-Draft-July-2023.pdf.
109 https://www.fsa.go.jp/inter/etc/20211104/01.pdf; the existence of standards implemented by professionals should also be noted, such as ARISTA (Responsible Investment Research Standard) and the “Deep Data Delivery Standard”.
110 The consultation was launched on 5 July and runs until 5 October, https://www.fca.org.uk/news/news-stories/we-welcome-consultation-new-code-conduct-environmental-social-and-governance-data-and-ratings
111 Transparency, good governance, prevention and management of conflicts of interest, implementation of robust systems and controls.
112 Article 45; the Commission may therefore adopt delegated acts and implementing acts.
113 From 1 July 2023 to 31 December 2023, https://spanish-presidency.consilium.europa.eu/fr/programme/priorites/.
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