On the 27th of November, EU Regulation 2024/3005 of the European Parliament and Council was published on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities (hereinafter referred to as the “Regulation”), modifying EU Regulations 2019/2088 and 2023/2859. This Regulation attempts to regulate the rating activities which evaluate the level of commitment to sustainability of businesses and financial services.
Over the past few years, and with the aim of demonstrating and certifying their compliance with the sustainability targets implemented by the European Union and its member states, a large number of businesses and financial service providers have requested the certification of their compliance with said targets. This surge in demand has resulted in the appearance in the market of a large quantity of ESG targets rating agencies, which, for now, have been unable to standardise their rating criteria.
The Regulation aims at standardising and certifying the credibility of these certifications. For said aim, it introduces a common regulatory focus which permits the standardisation of the methodology and rating activities utilised by the agencies. Likewise, it attempts to avoid cases of conflict of interest between said agencies.
The Regulation shall apply to all environmental, social and governance rating activities which are public and issued by businesses operating in the EU, regardless of where they are located.
The rating agencies shall comply with the following criteria:
1- Agencies located in the EU shall obtain an authorisation from the European Securities and Markets Authority (ESMA). For those not located in the EU, they shall obtain an equivalent accreditation, approval of their rating activities by an authorised agency in the EU, and recognition of their compliance with EU criteria.
2- The rating activities shall be based on rigorous and justifiable methodologies, which shall be reviewed on an annual basis, at the very least.
3- The agencies shall be transparent in the methodology utilised and the limitations to the rating activities.
4- The agencies shall not offer rating services to an entity which may generate a conflict of interest.
5- The agencies may be subject to inspection and sanctions by the ESMA.
The Regulation shall enter into force on the 2nd of January 2025. However, it shall not apply until the 2nd of July 2026, the agencies being obliged to notify their activity, and apply for its registration and authorisation before the ESMA, before the 2nd of August 2026, in order to continue operating in the market.
In sum, by means of the introduction of this regulatory framework, the Regulation seeks to reinforce the credibility of ESG rating activities, wielding them as an important tool for investment decisions, as well as encouraging sustainable investment in line with the objectives and policies of the European Union.
Julio González Valverde
Vilá Abogados
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27th of December 2024