COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities
Date: 2023-06-13
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: administrative transparency, capital market, corporate governance, disclosure of information, environmental impact, financial legislation, investment, social impact, sustainable finance, trade information

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   EUROPEAN COMMISSION  Strasbourg, 13.6.2023  SWD(2023) 207 final  COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT  Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities {COM(2023) 314 final} - {SEC(2023) 241 final} - {SWD(2023) 204 final}  
 
 
Need for action 

Environment,  social  and  governance  (ESG)/sustainable  investing  is  becoming  an  important 
part  of  mainstream  finance,  with  some  estimates  valuing  it  at  USD 40 trillion  globally.  The 
EU has put in place the building blocks for a sustainable finance framework. Stakeholders are 
now  pointing  out  the  remaining  market  inefficiencies  and  regulatory  gaps,  which  have  the 
potential  to  hinder  the  development  of  the  EU  sustainable  finance  market  and  market 
integration. Many concerns have been raised about the functioning of the ESG ratings market. 

This  initiative  is  part  of  the  strategy  for  financing  the  transition  to  a  sustainable  economy, 
published  in  July  2021.  It  follows  work  started  in  2018  with  the  ‘Financing  Sustainable 
Growth’ action plan. This is one of the measures proposed by the European Commission to 
contribute to the objectives of the European Green Deal by improving the flow and quality of 
information  on  which  investors,  businesses  and  other  stakeholders  base  decisions.  ESG 
ratings  play  an  important  and  enabling  role  in  the  proper  functioning  of  the  EU  sustainable 
finance market, by providing important sources of assessments that can be used by investors 
and  financial  institutions  for  investment  strategies,  risk  management  and  internal  analysis. 
They  are  also  used  by  companies  that  seek  to  better  understand  sustainability  risks  and 
opportunities linked to their activities or those of their partners, and assess how they compare 
with their peers on these issues. 

Above all, this initiative aims to address the deficiencies in a market which is not functioning 
properly.  Users’  and  rated  companies’  needs  regarding  ESG  ratings  are  not  being  met  and 
confidence  in  ratings  is  being  undermined.  This  problem  has  a  number  of  different  aspects, 
mainly lack of transparency as to the methodologies and objectives of ESG ratings and lack of 
clarity  on  the  operations  of  ESG  rating  providers,  in  particular  how  they  manage  potential 
conflicts of interest. 

Consequently,  ESG  ratings  do  not  serve  their  purpose  and  do  not  sufficiently  enable  users, 
investors and rated companies to take informed decisions on ESG-related risks, impacts and 
opportunities.  Since  decisions  by  investors  and  businesses  are  crucial  for  the  transition  to  a 
climate-neutral and more sustainable economy, this ultimately hinders the market’s potential 
to contribute to the European Green Deal and achievement of UN Sustainable Development 
Goals. At the same time, it is crucial to foster trust in the operations of ESG rating providers 
by  ensuring  that  the  market  operates  properly  and  that  ESG  rating  providers  prevent  and 
manage conflicts of interest. Reliable and high-quality ESG ratings will also contribute to the 
integrity  of  the  financial  markets  and  investor  protection.  The  functioning  of  the  internal 
market  would  be  improved  by  greater  clarity  about  the  actions  of  entities  which  play  an 
increasingly important role in channelling finance. 

To this end, there are two specific objectives: (i) increased clarity on ESG ratings objectives, 
characteristics, the methodologies and the data sources used to obtain them; and (ii) increased 
clarity on the operations of ESG rating providers, and the prevention and mitigation of risks 
arising from conflicts of interest within providers. 

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With  sustainable  investing  and  ESG  ratings  attracting  increasing  attention  in  jurisdictions 
around the world, it is becoming essential for the EU to engage with its partners on the basis 
of  a  coherent  and  comprehensive  European  approach.  Similarly,  greater  attention  is  being 
paid  to  the  role  of  ESG  ratings  and  the  operations  of  ESG  rating  providers.  In  2022,  the 
International  Organization  of  Securities  Commissions (IOSCO) 
issued  a  number  of 
recommendations  for  ESG  rating  providers  and  regulators.  Several  jurisdictions  started  by 
adopting codes of conduct for ESG rating providers. 

Possible solutions 

A  number  of  legislative  and  non-legislative  policy  options  were  analysed  for  entities  (ESG 
rating providers) and for products (ESG ratings). Regarding the regulatory treatment of ESG 
rating  providers,  the  three  options  considered  are:  an  industry  code  of  conduct  (Option 1); 
registration and light supervision (Option 2); and authorisation, principle-based organisational 
requirements, transparency requirements and risk-based supervision (Option 3). Regarding the 
extent of transparency requirements on ESG ratings and their methodologies, objectives, the 
two  options  considered  are:  minimum  public  disclosure  requirements  (Option 1);  and 
minimum  public  disclosure  requirements  and  more  comprehensive  requirements  for 
disclosure  to  clients  of  ESG  rating  providers  and  rated  companies  (Option 2).  The  analysis 
also carefully considers the cost-effectiveness and coherence of the options. 

As to the scope, the widely agreed IOSCO definition of ESG ratings would form the basis of 
the definition of ESG ratings for this initiative. A definition of ESG ratings is needed to define 
the  scope  of  legislation  and  application  of  its  requirements.  This  initiative  would  target 
entities providing ESG ratings or scores to the public or to subscribers and would not cover 
financial  institutions  or  other  market  participants  developing  ESG  ratings  for  their  own 
purposes. 

Impacts of the preferred options 

Based on a comparison of the effectiveness, efficiency and coherence of the options analysed, 
the preferred option would  be a  combination of Option 3 on ESG rating providers (rules on 
authorisation,  organisational  requirements  and  supervision)  and  Option 2  on  ESG  ratings 
(minimum transparency disclosures on methodologies and objectives of ratings to the general 
public  and  more  comprehensive  disclosures  to  users  of  ESG  rating  providers  and  rated 
companies). The preference is for the combination of options that meets the objectives of the 
initiative in the most effective and efficient way. 

Even though the preferred option may entail higher upfront costs, in the long-term the benefits 
would be expected to outweigh the costs. The preferred option is expected to bring significant 
economic  benefits.  This  initiative  would  be  expected  to  have  a  positive  impact  on  the 
functioning of financial markets and the conditions for ESG investing. It should further enable 
investors  and  rated  entities  to  understand  the  ESG  ratings  on  the  market,  make  informed 
choices  about  them  and  reduce  both  the  cost  of  gathering  information  and  the  need  to  use 
additional providers, thus decreasing the cost of doing business and of due diligence. It would 
also  be  non-discriminatory  and  would  apply  equally  to  domestic  and  non-EU  market 

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participants. This initiative is likely to increase the cost of doing business in the short term, 
but  increased  trust  in  ESG  ratings  could  enhance  market  growth,  eventually  boosting 
profitability. For small providers, in order to mitigate the administrative burden and potential 
concerns about loss of access to the market, a transitional period is envisaged, to allow them 
more time to adjust. 

The  initiative  is  also  expected  to  have  positive,  though  marginal,  indirect  social  and 
environmental impacts. 

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