EU agreement on ESG ratings considered the most stringent in the world

European Union provisional agreement to put guardrails around ESG [environmental, social, and governance] The rating industry is said to be the toughest in the world.

Raza Naim, financial regulation partner at Linklaters, said in a statement on Tuesday that the plan is “far more advanced than any other regime we have seen internationally.” Naeem said the proposed rules were “very broad in scope” and “could incorporate ESG products that do not fit into traditional ESG rating concepts,” and plans to target rating providers. He pointed out that there is. He “separates and separates certain competing business activities.”

The key takeaway, Linklaters said, is that “the final agreed rules promote a ‘dual materiality’ approach, whereby the ratings provided pose a significant financial risk to the rated entity; “We require companies to explicitly disclose whether they have addressed both material impacts on company performance.” Should we consider E, S, G elements, or just one of these? ”

Additionally, raters may need to provide separate scores for a company’s environmental, social, and governance profile, rather than combining all three factors into one score. According to a statement from the European Council, if evaluators provide a single number, they will need to clarify how to weight E, S and G.

Under the agreement, EU-based ESG rating providers “will be required to obtain authorization” from the European Securities and Markets Authority, the board said. “If an ESG rating provider established outside the EU wishes to operate within the EU, it will need to have its ESG ratings approved by an EU-accredited ESG rating provider,” the report states.

The interim agreement reached by the European Council and the European Parliament on the regulation of environmental, social and governance rating activities aims to boost investor confidence in sustainable financial products, says the Belgian President of the Council of the European Union. the country said in a post to X.

Under this agreement, ESMA may decide to exempt smaller ESG rating providers from some of the requirements. “However, it will be based on the nature, size and complexity of the ESG rating provider’s business, and only if duly justified and based on the nature and scope of the ESG rating provider’s” issuance of an ESG rating,” the council said. Ta.

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