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Commission proposal for a Regulation on their transparency and integrity
Environmental, Social and Governance (ESG) rating activities play an important role in the EU sustainable finance market as they provide information to investors and financial institutions regarding, for example, investment strategies and risk management on ESG factors.

ESG ratings have an increasingly important impact on the operation of capital markets and on investor confidence in sustainable products. The market of ESG ratings is expected to continue to grow substantially in the coming years.

According to Commission, 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.

On 13 June 2023, the Commission presented a proposal on a Regulation on transparency and integrity of ESG rating activities, as part of its renewed sustainable finance strategy, launched in 2021.

The proposal aim to improve the reliability, comparability and transparency of ESG ratings. More specifically, it 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.

The proposal does not intend to harmonising 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).

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