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Agreement Reached by Council and Parliament on Environmental, Social, and Governance (ESG) Ratings

Lawmakers in the European Parliament and the Council confirmed they had reached a provisional agreement on a proposal to regulate ESG rating providers and introduce rules to increase the reliability and comparability of ESG ratings and prevent conflicts of interest for providers.

Under the new rules, ESG rating providers will need to be authorized and supervised by the European Securities and Markets Authority (ESMA) and comply with transparency requirements, particularly regarding their methodology and sources of information.

Key aspects of the provisional agreement:The Council and the Parliament clarified the circumstances under which ESG ratings fall under the scope of the regulation, providing further details on the applicable exclusions. The agreement also defines the territorial scope of the regulation by setting out what constitutes operating in the EU.

The new regulation would require ESG rating providers established in the EU to obtain authorization from ESMA. Those established outside the EU must be either endorsed by an EU-authorized provider, recognized based on quantitative criteria or subject to an equivalence decision based on dialogue between the providers’ country of origin’s authorities and ESMA to operate in the EU.

The agreement also introduced a 3-year optional registration scheme for small ESG rating providers, including exemption from paying ESMA supervisory fees and lighter compliance and transparency requirements, but with full compliance and supervisory fees after the end of the three years.

While the Commission’s proposal required a separation of certain business activities from ESG ratings, with rating providers not allowed to provide these activities, the agreement allows for providers not to set up separate legal entities for some activities as long as there is a clear separation between these activities and the ESG rating business, as well as measures put in place to avoid potential conflicts of interest. However, these exceptions would not apply to ESG rating providers that offer consulting, audit and credit rating activities.

With the achievement of the provisional agreement, the new rules will need to be formally adopted by the EU Council and Parliament before officially entering into force and will begin applying 18 months later.

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