Toelichting bij COM(2023)314 - Transparantie en integriteit van op ecologische, sociale en governancefactoren gebaseerde ratingactiviteiten - Hoofdinhoud
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| dossier | COM(2023)314 - Transparantie en integriteit van op ecologische, sociale en governancefactoren gebaseerde ratingactiviteiten. |
|---|---|
| bron | COM(2023)314  |
| datum | 13-06-2023 |
•Reasons for and objectives of the proposal
This proposal is an integral part of the European Commission’s renewed sustainable finance strategy adopted in July 2021. 1
Environmental, social, and governance (ESG) investing, that is, investing which takes ESG factors into account when making investment decisions (also referred to as sustainable investments), is becoming an important part of mainstream finance. Notably, investment funds with sustainable characteristics or objectives have largely increased in number, size and the type of capital they attract. In this context, an ESG investment ecosystem has developed, including amongst others the supply of ESG ratings. Such ESG ratings are marketed as providing an opinion on the exposure of a company or entity to environmental, social and/or governance factors, and their impact on society.
ESG ratings have an increasingly important impact on the operation of capital markets and on investor confidence in sustainable products. In particular, ESG ratings play an enabling role for the proper functioning of the EU sustainable finance market by providing critical sources of information for investment strategies, risk management and disclosure obligations by investors and financial institutions. They are also used by undertakings who seek to better understand sustainability risks and opportunities linked to their activities or those of their partners, and for comparison to their peers.
The market of ESG ratings is expected to continue to grow substantially in the coming years. Growth and increase in demand for ESG ratings is driven by the changing nature of risks to companies, by growing investor awareness of the financial implications of those risks and by the growth in investment products that explicitly seek to meet certain sustainability standards or achieve certain sustainability objectives. It is also linked to the sustainable finance legislation put forward by the EU since 2018.
However, the current ESG rating market suffers from deficiencies and is not functioning properly, with investors and rated entities’ needs regarding ESG ratings are not being met and confidence in ratings is being undermined. This problem has a number of different facets, mainly (i) the lack of transparency on the characteristics of ESG ratings, their methodologies and their data sources and (ii) the lack of clarity on how ESG rating providers operate.ESG ratings do not sufficiently enable users, investors and rated entities to take informed decisions as regards ESG-related risks, impacts and opportunities.
Hence, the Commission committed in the renewed sustainable finance strategy, to take action to improve the reliability, comparability and transparency of ESG ratings. More specifically, this proposal aims to enhance the quality of information about ESG ratings, by (i) improving transparency of ESG ratings characteristics and methodologies, and by (ii) ensuring increased clarity on operations of ESG rating providers and the prevention of risks of conflict of interest at ESG rating providers’ level. Since ESG ratings and underlying data are used for investment decisions and allocation of capital, the general objective of the initiative is to improve the quality of ESG ratings to enable investors to make better informed investment decisions in regard to sustainability objectives. It will also enable rated entities to take informed decisions about managing ESG risks and the impact of their operations. At the same time, it is crucial to foster trust and confidence in the operations of ESG rating providers by ensuring that the market operates properly and ESG rating providers prevent and manage conflicts of interest.
This proposal does not intend to harmonise the methodologies for the calculation of ESG ratings, but to increase their transparency. ESG rating providers will remain in full control of the methodologies they use and will continue to be independent in their choice, to ensure that a variety of approaches are available in the ESG ratings market (i.e. ESG ratings may differ amongst themselves and cover different areas).
This proposal aims to make it easier to exploit the potential of the European Single Market and the Capital Markets Union and to contribute to the transition towards a fully sustainable and inclusive economic and financial system in accordance with the European Green Deal 2 and UN Sustainable Development Goals.
Significant investment is required across all sectors of the economy to transition to a climate-neutral economy and reach the Union’s environmental sustainability objectives. It should be made easier for investors and undertakings to identify environmentally sustainable investments and ensure that they are credible.
The present initiative is not a regulatory fitness and performance programme (REFIT) initiative.
•Consistency with existing provisions in the policy area
The EU has put in place the building blocks for a sustainable finance framework 3 . Stakeholders are now pointing out remaining market inefficiencies and regulatory gaps that could hinder the development of the market. ESG rating providers and data providers use information published by undertakings; the availability, accuracy and consistency of this data are key to the quality of the downstream products that depend on it. Under the Corporate Sustainability Reporting Directive (CSRD) 4 and the EU Taxonomy Regulation 5 , undertakings are required to produce information on specific ESG factors. ESG ratings will build on and complement that by providing critical sources of information for investment strategies, risk management and internal analysis by investors and financial institutions. ESG rating providers use data coming from undertakings, and the more reliable, accurate and standardised data that is available, the less need there is to use estimations to fill in the gaps. For instance, corporate sustainability reports will facilitate the assessments carried out by the ESG rating providers.
In addition, the new requirements imposed on financial institutions and market participants by the sustainable finance legislation (such as the CSRD, Sustainable Finance Disclosure Regulation 6 and the EU Taxonomy Regulation) will lead to an increased demand for ESG ratings.
This initiative also interacts with the work on green bonds standards and EU climate benchmarks. Regarding the proposal for a European Green Bond Regulation, 7 issuers of future EU green bond standards are required to disclose the taxonomy-alignment of projects funded by their bonds. For that purpose, they may seek ESG ratings to obtain underlying data that would feed into their projects assessments. The information disclosed in ESG ratings helps investors, including green bond investors, to better assess the overall non-financial performance of undertakings.
As for the EU Climate Benchmark Regulation, 8 a Delegated Regulation 9 lays down a list of ESG factors to be disclosed by benchmark administrators, for those benchmarks that pursue ESG objectives, depending on the type of underlying assets concerned (e.g. equity, fixed income, sovereign). They will have to source the information directly from undertakings (e.g. via their annual reports) or obtain this information from external rating/data providers. The Delegated Regulation gives benchmark administrators the option of disclosing information on ESG ratings of the benchmarks. Better information on the methodologies used for ESG ratings should help provide benchmark administrators with clarity regarding the constituents of the benchmarks. Better, more reliable ratings will build benchmark administrators’ trust, and eventually improve the adoption of those ratings as a reliable tool for designing meaningful benchmarks. Further, it will help benchmark users to ensure they identify benchmarks that are aligned with their investment strategy and help them to implement it, avoiding risks of greenwashing. This Regulation should also improve the confidence of investors in ESG benchmarks and, thus further support sustainable investing.
•Consistency with other Union policies
This proposal is part of a package of sustainable finance measures that is a priority under the Capital Markets Union project. It contains measures to harness the transformative power of financial services and to shift private capital towards sustainable investment. It contributes to the development of more integrated capital markets by making it easier for investors to benefit from the single market whilst taking better informed decisions. For instance, the European Single Access Point (ESAP) gives stakeholders easier access to data, and can also serve as a source of information / input data for ESG rating providers, reducing the use of estimations but also contributing to better quality of ratings overall.
This proposal also complies with the overarching policy goals of the European Green Deal. The European Green Deal is the Union’s response to the generation-defining climate and environment-related challenges. It aims to transform the Union into a modern, resource-efficient and competitive economy with no net emissions of greenhouse gases by 2050.
Furthermore, a fully functioning and integrated market for capital will allow the EU’s economy to grow in a sustainable way and be more competitive, in line with the strategic priority of the Commission for an Economy that Works for People, focused on creating the right conditions for job creation, growth and investment.
This proposal complements the existing EU environmental and climate policies by making the methodologies for ESG ratings more transparent, which should lead to the more efficient channelling of investment towards sustainable assets.
Inhoudsopgave
•Legal basis
This proposal falls within the area of shared competence in accordance with Article 4(2)(a) of the Treaty on the Functioning of the European Union (TFEU) and is based on Article 114 TFEU, which confers on the EU competence for laying down appropriate provisions for the establishment and functioning of the internal market.
Article 114 TFEU allows the Union to take measures not only to eliminate existing obstacles to the exercise of the fundamental freedoms, but also to prevent the likely emergence of such obstacles in the future. This includes obstacles that make it difficult for market participants, such as ESG rating providers or investors, to take full advantage of the benefits of the internal market.
•Subsidiarity (for non-exclusive competence)
The objective of this initiative, to improve clarity as to the characteristics and objectives of ESG ratings and the operations of ESG rating providers, cannot be adequately achieved by Member States acting independently and thus action at EU level is necessary for the proper functioning of EU capital markets.
There is currently no EU regulatory framework for ESG rating providers. Member States do not regulate the activities of ESG rating providers or the conditions under which they provide ESG ratings. Each ESG rating provider follows its own rules, with a lack ofclarity as to what they do and how they do it.
The ESG ratings market is global. Some large ESG providers have their headquarters in the EU, whereas many others are headquartered outside the EU but have subsidiaries within the EU.
Although Member States could individually take action to strengthen the reliability and transparency of ESG ratings, such measures are likely to differ significantly between Member States. This may create diverging levels of transparency, barriers for market participants and challenges for those operating across borders (as they do in the EU market, with users across a number of Member States), in addition to limiting comparability between ratings. Alternatively, with no f rules at all on the operations of ESG rating providers, the current situation and the transparency issues relating to transparency would continue and could even worsen.
With sustainable investing and ESG ratings attracting increasing attention in jurisdictions around the world, it is becoming essential for the EU to engage with its partners on the basis of a coherent and comprehensive harmonised approach. The initiative would not replace national legislation as currently no Member State has legislation regulating the functioning of ESG rating providers.
The functioning of the internal market would be improved by greater clarity about the operations of entities that are increasingly important for channelling finance.
•Proportionality
This proposal complies with the principle of proportionality as set out in Article 5 TFEU. The proposed measures are necessary to achieve the objectives, and also the most suitable.
The proposal focuses on the activities of providers of ESG ratings operating in the EU. It addresses market shortcomings, namely: (a) the lack of clarity on the characteristics of ESG ratings, the methodologies used and data sources, and (b) the lack of clarity about, and control of, operations of ESG rating providers.
This proposal goes no further than is necessary to address and remedy each of these issues in the most effective way, namely by: (1) creating an authorisation system that would apply to ESG rating providers operating in the EU, subjecting them to proportionate rules governing their operations and ongoing proportionate supervision, and (2) requiring ESG rating providers operating in the EU to publish key information about ESG rating characteristics and methodologies, and disclose granular methodological information to their subscribers and to rated entities.
This proposal does not include in-house ratings developed by asset managers or other institutions such as benchmark administrators, as they are used for own decisions and investments and do not serve the same purpose and are not subject of public disclosure or distribution by subscription or other means.
As a result, This initiative will target legal persons providing ESG ratings to the public or to subscribers. It will not cover financial institutions or other market participants developing ESG ratings for their own purposes or own use.
•Choice of the instrument
This proposal aims to put in place a system that would improve clarity as to the characteristics of ESG ratings. To that effect, it sets rules for ESG rating providers operating in the EU. The proposal seeks to make it easier to better exploit the potential of the European single market and to contribute to the transition towards a fully sustainable and inclusive economic and financial system in line with the European Green Deal and UN Sustainable Development Goals. A regulation is necessary to achieve these policy objectives and is the best way to improve clarity as to operations by entities that are increasingly important for channelling finance.
A regulatory framework would be aligned with the approach taken for other financial market participants and relevant legislation, e.g. the EU Benchmark Regulation, Credit Rating Agencies Regulation and EU Green Bond Standard proposal that provide for ongoing supervision and lay down a number of organisational requirements and requirements concerning governance processes and documents. Other tools such as soft law measures and codes of conduct would only partially achieve the objectives of this initiative, since there would be no incentive to produce a sufficiently rigorous code of conduct. Existing market pressures would determine the rigour and comprehensiveness of a code, and those pressures have proven insufficient to address the problems. Moreover, a code of conduct would be voluntary. Some providers might choose not to adopt it, or multiple industry codes might arise. Both cases would undermine any prospect of greater clarity across the market for users or rated entities.
•Ex-post evaluations/fitness checks of existing legislation
Not applicable.
There is currently no EU-level legal regime for ESG ratings.
•Stakeholder consultations
The Commission has gathered a significant amount of evidence from different sources, including a study commissioned by the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), a Commission consultation and outreach activities and exchanges with stakeholders. The European Securities and Markets Authority (ESMA) also supported the Commission’s work via a call for evidence published in 2022 and provided a mapping of ESG rating providers operating in the EU. The Commission also analysed existing international recommendations and codes for ESG rating providers, in particular the recommendations from the International Organization of Securities Commissions (IOSCO). A total of 168 organisations and private individuals responded to the targeted consultation supporting this initiative, mainly investors, ESG rating providers and listed companies.
•Collection and use of expertise
To better understand the problems which the market faces in practice, and following the targeted consultation, the Commission has undertaken a major review of academic literature 10 , market analysis and outreach activities with a large number of key stakeholders in the ESG ratings market.
Between April and October 2022, the Commission held bilateral meetings with various stakeholders, including 14 different ESG rating providers, users, and associations representing, among others, rating users, academics, non-governmental organisations, public bodies and supervisory authorities.
The Commission also held regular calls with ESMA for its opinion and advice, including on a potential authorisation and supervision regime for ESG rating providers at EU level.
•Impact assessment
This proposal is accompanied by an impact assessment 11 , which was submitted to the Regulatory Scrutiny Board (RSB) on 16 November 2022 and, received a positive opinion with reservations on 16 December.
The impact assessment concludes that the key problem is two-fold: while investors and undertakings observe issues with the reliability, accuracy and timeliness of ESG ratings, rated entities are unsure which categories/criteria are used to assess them and how accurately ESG ratings reflect their actual performance and how to improve it.
There are several consequences of this problem. The consequences from a user’s perspective are:
(1)Investors are unable to take sufficient account of sustainability-related and other non-financial risks and opportunities in their investment decisions,
(2)Investors are also less able to channel financial resources to undertakings and economic activities that address and do not exacerbate social and environmental problems,
(3)Benchmark administrators construct benchmarks based on ESG ratings where they do not have fully clarity over how they were computed,
(4)Undertakings cannot consider all potential risks and opportunities from their activities and channel investments accordingly.
The specific consequence from a rated entity perspective is that they may receive an ESG rating in relation to elements that are outdated or incorrect, which can impact the terms of their access to finance.
The specific consequence from other stakeholders’ perspective is that non-governmental organisations, trade unions and other stakeholders are less able to hold undertakings accountable for their impacts on society and the environment.
The problems have negative consequences for the functioning of the EU sustainable finance market, leaving a gap in the EU sustainable finance framework that was established to provide more transparency and the tools for private capital to flow to sustainable investments that are urgently needed for the transition. The wider consequences are that the potential of the European Single Market to contribute to the objectives of the European Green Deal, and to the achievement of the UN Sustainable Development Goals, is not fully utilised.
Two complementary problem drivers were identified:
(1)Lack of clarity about and control of operations of ESG rating providers.
(2)Lack of clarity on the charateristics of ESG ratings, their methodologies and their data sources (this includes how they are created and disclosure/transparency on these), and
The impact assessment considered a range of policy options for two main variables:
·increased clarity on operations of ESG rating providers and the prevention of risks of conflict of interest at ESG rating providers level, and
·the need to improve clarity of ESG ratings characteristics (i.e. what they mean and what objectives they pursue, the methodologies and the data sources or estimates used for their development).
Several legislative and non-legislative policy options were analysed for the following two dimensions: entities (ESG rating providers) and products (ESG ratings). Regarding the regulatory treatment of ESG rating providers, the three options considered were an industry code of conduct (Option 1), registration and light supervision (Option 2), and authorisation, principle-based organisational requirements, and risk-based supervision (Option 3). Regarding the extent of transparency requirements on ESG ratings and their methodologies, the two options considered are minimum disclosure requirements to the public (Option 1) and minimum disclosure requirements to the public and more comprehensive disclosure requirements to clients of ESG rating providers and rated entities (Option 2). The analysis also considers carefully their cost-effectiveness and coherence. The following options were discarded at an early stage: registration and supervision at national level, harmonising methodologies of ESG rating providers, setting minimum requirements on the content of ESG ratings and detailed templates for disclosure requirements.
As to the scope, the definition of ESG ratings by IOSCO would form the basis for the scope of this initiative, covering both scores and ratings, and products which are a mixture of both. This initiative would target the specialised entities providing ESG ratings or scores to the public or to subscribers and would not cover financial institutions or other market participants developing ESG ratings for their own purposes, as they use their own proprietary models and don’t provide ESG ratings commercially to other financial market participants.
Based on the comparison of effectiveness, efficiency and coherence, the preferred option would combine Option 3 on ESG rating providers (authorisation, organisational requirements and supervision) together with Option 2 on ESG ratings (minimum transparency disclosures to the general public and more comprehensive disclosures to clients of ESG rating providers and rated entities). The detailed analysis found that the combination of such options would fully address the objectives (unlike the other options) and result in the highest benefits to users and rated entities, and providers themselves and society. Even though the preferred option may entail higher upfront costs, in the long-term the benefits are expected to outweigh the costs.
The preferred option is expected to bring significant economic benefits. This initiative would be expected to positively influence the functioning of financial markets and conditions for ESG investing. The preferred option should enable investors, and rated entities, to understand and make informed ESG choices regarding ratings. It should also reduce the cost of gathering information and the need to use extra providers, thus cutting the cost of doing business. The preferred option would also be non-discriminatory and would apply equally to domestic and non-EU market participants. This initiative may have an impact on the general competitiveness of the ESG rating providers, likely increasing the cost of doing business for them in the short term, but increased trust in ESG ratings could enhance market growth. To mitigate potential concerns about loss of access to the market, a transitional period could be provided for, which would give smaller players in particular more time to adjust. The initiative is also expected to have positive, though marginal, indirect social and environmental impacts.
•Regulatory fitness and simplification
The present initiative is not a regulatory fitness and performance programme (REFIT) initiative.
To mitigate costs and impacts of new requirements under this Regulation on smaller providers, the following mitigating measures are be proposed.
(1)Transition period. To mitigate potential concerns about loss of access to market providers due to the authorisation process, providers would be allowed to continue operating on condition that they notify ESMA and become authorised within a pre-determined period of time, i.e. the transitional period.
(2)Adjustment of supervisory fees to the size of the provider. Fees would be proportionately distributed across providers based on their annual net turnover.
(3)Proportionate supervision. ESMA has adopted a risk-based, data-driven approach to conducting supervision 12 and prioritises its supervisory activities according to the level of risk identified and the importance/size of supervised entities.
(4)Possibility for smaller and innovative entities to apply for exemption from a wide range of internal organisational measures, if they can demonstrate the requirements are disproportionate to the nature, scale and complexity of their business and the nature and range of issues assessed by their product (e.g. data-driven rater 13 or innovative, forward-looking rater) 14 .
•Fundamental rights
The proposal respects the rights and principles set out in the Charter of Fundamental Rights of the European Union, in particular those in Article 16 (freedom to conduct a business). The free movement of persons, services and establishment is one of the basic rights and freedoms protected by the Treaty on the European Union and the Treaty on the Functioning of the European Union and is relevant for this measure.
This proposal empowers ESMA to carry out a new function, namely to authorise and supervise ESG rating providers providing their services under this Regulation. This will require ESMA to charge ESG rating providers fees, which should cover all administrative costs incurred by ESMA for its authorisation and supervision activities. The size of the market is 59 entities: 30 ESG providers based in the EU (3 large, 6 medium-sized, 9 small and 12 micro); and 29 non-EU entities. Based on the estimation that it would take ESMA 1.7 full-time equivalents (FTEs) to supervise a large ESG rating provider and 0.2 FTEs to supervise a small ESG rating provider, we have calculated the need for 20 FTEs annually. Based on the same estimation, ESMA would need 7 temporary agent (AC) posts and 12 CA posts for the authorisation of 30 EU entities and 29 non-EU entities, and the supervision of 30 EU entities and 29 non-EU entities starting from year N+1. We consider it likely that there will be a peak of one-off work in the first year (year N) relating to authorisation. It is important, therefore, that ESMA is given the 19 FTEs from the outset, to manage this peak.
The total annual cost increase is estimated at approximately EUR 3.7-3.8 million. This cost will not be borne by EU budget, as the proposal will enable ESMA to charge ESG rating providers authorisation and supervisory fees, so as to cover all supervisory costs. This is similar to other areas, where ESMA is responsible for the oversight of certain entities (e.g. credit rating agencies). For more details please see the Financial Legislative Statement.
•Implementation plans and monitoring, evaluation and reporting arrangements
The Commission will ensure that the actions selected in this Regulation contribute to achieving the policy objectives with a blend of specific monitoring elements designed to measure efficiency in implementation and progress towards specific objectives, but also, other monitoring tools contributing to the general objectives. Those elements and tools are further described below. To monitor progress towards meeting the specific objectives, the Commission will explore the possibility of organising periodic surveys of investors, undertakings and ESG rating providers.
The surveys would gather data on: (1) users’ and rated entities’ perceptions of changes in the information available particularly with respect to the specific objectives identified in Section 4, and perceptions as to whether those objectives are being met; and (2) the costs and benefits of ESG rating regulation and oversight from an ESG rating provider’s perspective. Such surveys will be dependent on the availability of financial resources.
Progress towards meeting the specific objectives can also be monitored through a number of indicators, such as the number of ESG ratings made available, growth in use of ESG ratings by users and issuers and increase in overall correlation between ESG ratings.
Monitoring progress towards meeting the general objectives is by definition considerably more complex since it is methodologically difficult to distinguish the impacts of the proposed measures on ESG ratings from other possible factors. Nevertheless, the Commission proposes to monitor progress regarding the general objectives by:
–monitoring trends in investments in undertakings that carry out sustainable economic activities, covering environmental, social and governance aspects 15 ;
–engaging with supervisors and other relevant stakeholders to assess whether concerns of greenwashing involving ESG ratings are being reduced.
It may also be possible to use the proposed surveys of investors, undertakings and ESG rating providers to gather evidence on whether stakeholders perceive that ESG rating providers are more accountable for their activities.
As supervisor of the ESG rating providers under this initiative, ESMA would be the appropriate body to take stock of the developments and highlight potential issues of concern, liaising with relevant national authorities in the Member State where ESG ratings are used and where ESG rating providers are located and have their operations.
In addition, various stakeholders, including civil society organisations, ESG rating providers, business organisations and public authorities, are likely to publish reports that monitor developments in this area, which will be a useful complement to the monitoring carried out by the Commission.
Both the indicators above and surveys will help evaluate whether the preferred policy option is successful in achieving the specified objectives. These indicators will then serve as a basis for an evaluation that should be presented at the latest 5 years after the entry into force of the present initiative. The draft proposal will further contain a commitment to evaluate the impacts of the new legislative act. The Commission will start monitoring implementation of the preferred policy option after the entry into force of the initiative.
•Explanatory documents (for directives)
Not applicable.
•Detailed explanation of the specific provisions of the proposal (to be completed when clarity on articles numbering/reordering)
Title I lays down the subject matter, scope and definitions applicable to the Regulation. Article 1 sets out the subject matter of the Regulation, namely the introduction of a common regulatory approach to enhance the integrity, transparency, responsibility, good governance and independence of ESG rating activities, contributing to the transparency and quality of ESG ratings provided to regulated European financial undertakings and European undertakings. The Regulation also lays down transparency requirements related to ESG ratings and rules on the organisation and conduct of ESG rating providers. Article 2 relates to the scope of this Regulation, which applies to ESG rating activities provided by ESG rating providers operating in the EU. Article 3 sets out the definitions for the purposes of this Regulation.
Article 4 to 8 lay down requirements relating to the process for authorisation of ESG rating providers, including the submission of an application for authorisation, its examination, notification of a decision to authorise, refuse or withdraw an authorisation by ESMA. Article 9 to 12 establishes rules on the provision of ESG ratings in the EU by third country ESG rating providers. Article 9 lays down requirements relating to equivalence decisions, while Article 10 covers requirements on endorsement of ESG ratings and Article 11 lays down requirements on the recognition process. Article 12 concerns cooperation arrangements between ESMA and third country supervisory authorities. Article 13 introduces a requirement for ESMA to maintain a register on its website with all authorised ESG rating providers and provides for requirements on the accessibility of information on the European Singly Access Point (ESAP).
Title III of the Regulation sets out the principles on the integrity and reliability of ESG rating activities.
Chapter 1 determines the organisational requirements, processes and documents concerning governance for ESG rating activities. Article 14 lays down the general principles to be followed by ESG rating providers including the need to employ appropriate systems, resources and procedures and ensure the independence of activities. Article 15 requires ESG rating activities to be separated from a number of activities, including the provision of consulting activities, issuance and sale of credit ratings and development of benchmarks. Article 16 lays down in more details the obligations for rating analysts, employees and other persons involved in the provision of ESG ratings. Article 17 introduces requirements on record-keeping related to ESG rating activities. Article 18 then sets out obligations for ESG rating providers to have an independent complaints procedure established to ensure that stakeholders are able to notify them of complaints and that the ESG rating provider objectively evaluates the merits of any complaint. Article 19 introduces requirements and safeguards relating to the outsourcing of some functions related to ESG rating activities to third parties. Article 20 sets out exemptions on governance requirements that can be awarded by ESMA to those ESG rating providers that are meeting criteria in particular related to their size.
Chapter 2 covers the transparency requirements of ESG ratings’ activities. Article 21 introduces the transparency requirements over ESG rating activities to be made available to the public. Article 22 introduces transparency requirements over ESG rating activities to be made available to the subscribers of ESG ratings and to rated entities.
Chapter 3 lays down obligations relating to the independence and conflict of interests of ESG rating providers. Article 23 requires ESG rating providers to have in place robust governance arrangements which include a clear organisational structure with well-defined, transparent and consistent roles and responsibilities for all persons involved in the provision of an ESG rating. Article 24 lays down requirements on the management of potential conflicts of interest by employees involved in the provision of ESG ratings. Article 25 sets out obligations for ESG ratings’ fees that are charged to clients to be fair, reasonable, transparent, non-discriminatory and based on actual costs.
Chapter 4, Article 26 to 39, sets out ESMA’s powers with regard to the supervision of ESG rating providers. These include the power to request information by simple request or by decision, the power to conduct general investigations and the power to conduct on-site inspections. The chapter also sets out the conditions under which ESMA may exercise its supervisory powers. Several provisions specify the supervisory measures, fines and periodic penalties ESMA may impose. ESMA is also enabled to charge authorisation and supervisory fees.
Chapter 5 lays down principles on cooperation between ESMA and national competent authorities.
Title IV on Delegated and Implementing Acts confers on the Commission the power to adopt delegated acts subject to the conditions laid down in Article 45.
Title V on transitional and final provisions sets out the date by when ESG rating providers should apply for authorisation, also providing for a transitional period for small and medium-sized ESG rating providers that are offering their services prior to the entry into application of the Regulation. It also introduces a transitional period for new entrants to the market that are small and medium sized ESG rating providers.