This Regulation establishes a comprehensive framework for regulating Environmental, Social and Governance (ESG) rating activities in the European Union. It aims to enhance transparency, integrity, and reliability of ESG ratings while preventing greenwashing and ensuring high levels of investor protection.The Regulation introduces mandatory requirements for ESG rating providers operating in the EU, including authorization by ESMA, organizational requirements, transparency obligations, and conflict of interest management. It establishes three regimes for third-country providers: equivalence, endorsement and recognition.Key provisions include:
- Mandatory separation of ESG ratings from certain other business activities like consulting, credit ratings and auditing
- Requirements to provide separate E, S and G ratings rather than just aggregated ESG ratings
- Detailed disclosure obligations regarding methodologies, data sources, and potential conflicts of interest
- Supervision and enforcement powers granted to ESMA, including ability to impose fines
- Special temporary regime for small ESG rating providers to facilitate market entry
The Regulation will apply from July 2026, with existing providers required to apply for authorization within specified timeframes. It represents a landmark initiative to regulate the ESG ratings market and improve the quality and reliability of sustainability-related information available to investors.The act is particularly significant as it establishes the first comprehensive regulatory framework for ESG ratings globally and aims to address concerns about transparency, conflicts of interest and reliability in this rapidly growing market segment.
