BAKGRUNN (fra kommisjonsforslaget)

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. 

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 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.