COMMISSION STAFF WORKING DOCUMENT 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

EN 

  EN 

   EUROPEAN COMMISSION  Strasbourg, 13.6.2023  SWD(2023) 204 final  COMMISSION STAFF WORKING DOCUMENT  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) 207 final}  
 
 
Table of contents 

1. 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT  .................................... 5 

What is the legal and policy context? .......................................................................... 5 

2.  PROBLEM DEFINITION .......................................................................................... 8 

2.1.  What is/are the problems ......................................................................................... 10 

2.1.1. 
and timeliness of ESG ratings ............................................................................................... 10 

Investors and companies observe issues with the reliability, accuracy 

2.1.2.  Problems from the perspective of rated entities – unsolicited ratings ..................... 11 

2.1.3.  Consequences .......................................................................................................... 13 

2.2.  What are the problem drivers .................................................................................. 13 

2.2.1.  Problem  driver  1:  Lack  of  clarity  on  the  characteristics  of  ESG 
ratings, the methodologies used and data sources ................................................................. 14 

2.2.2.  Problem driver 2: Lack of clarity about, and control of, operations of 
ESG rating providers ............................................................................................................. 20 

3.  WHY SHOULD THE EU ACT? .............................................................................. 22 

3.1  Legal basis ....................................................................................................... 22 
3.2  Subsidiarity: Necessity of EU action ............................................................... 22 
3.3  Subsidiarity: Added value of EU action .......................................................... 23 

4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? ..................................................... 23 

4.1  General objectives ........................................................................................... 23 
4.2  Specific objectives ........................................................................................... 23 

5.  WHAT ARE THE AVAILABLE POLICY OPTIONS? .......................................... 24 

5.1  WHAT IS THE BASELINE FROM WHICH OPTIONS ARE ASSESSED? ......... 24 

5.2  Description of policy options .......................................................................... 25 
5.2.1  Regulatory treatment of ESG rating providers ................................................ 26 
5.2.2  Level of transparency requirements on ESG ratings and their methodologies 29 
5.3  Scope, Definition of ESG ratings and types of providers ............................... 30 
5.3.1  Entities to be covered/geographical coverage ................................................. 30 
5.3.2  Alternative coverage of geograhical scope ...................................................... 31 
5.3.3  Types of providers ........................................................................................... 32 
5.3.4  Defining ESG ratings ...................................................................................... 32 
5.4  Options discarded at an early stage ................................................................. 33 
5.4.1  Registration and supervision at national level, ................................................ 33 
5.4.2  Setting minimum requirements on the content of ESG ratings, ...................... 33 
5.4.3  Detailed templates for disclosure requirements. ............................................. 33 
5.5  CRAs - Options out of scope of this Impact Assessment ................................ 34 
5.5.1  Possible policy options: ................................................................................... 34 

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5.5.2  Analysis: .......................................................................................................... 34 
5.5.3  Conclusions ..................................................................................................... 35 

6.  WHAT  ARE  THE  IMPACTS  OF  THE  POLICY  OPTIONS  AND  HOW  DO  THEY 
COMPARE? .............................................................................................................. 35 

6.1  Options on regulatory treatment of ESG rating providers ............................... 35 
6.1.1  Impacts of the Policy Options ......................................................................... 35 
6.1.2  Option 2: Registration and light supervision ................................................... 37 
6.1.3  Option  3:  Authorisation,  principle-based  organisational  requirements  and  risk-

based supervision............................................................................................. 38 
6.1.4  Comparison of options .................................................................................... 40 
Comparison with regards to effectiveness: ............................................................... 40 
Comparison with regards to efficiency (cost-effectiveness): .................................... 41 
Comparison with regards to policy coherence: ......................................................... 41 
6.2  Options on transparency requirements ............................................................ 43 
6.2.1  Impacts of the policy options .......................................................................... 43 
6.2.2  Comparison of options .................................................................................... 47 

7.  PREFERRED OPTION ............................................................................................. 49 

7.1  Summary of preferred option .......................................................................... 49 
7.2  Legislative approach ........................................................................................ 50 
7.3  Combination of options, discarded at early stage ............................................ 50 
7.4 
Impacts of preferred option ............................................................................. 51 
Economic impacts ................................................................................................................. 51 

Impact on UN Sustainable Development Goals (SDGs) ....................................................... 52 

Environmental Impacts .......................................................................................................... 52 

Social Impacts ....................................................................................................................... 52 

Impact on fundamental rights ................................................................................................ 52 

7.5  Application of the ‘one in, one out’ approach and REFIT .............................. 53 

8.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? ....... 53 

ANNEX 1: PROCEDURAL INFORMATION ................................................................ 55 

ANNEX 2: STAKEHOLDER CONSULTATION (SYNOPSIS REPORT) .................... 59 

ANNEX 3: WHO IS AFFECTED AND HOW? ............................................................... 68 

ANNEX 4: INTERACTIONS WITH OTHER SUSTAINABLE FINANCE LEGISLATION 
AND INITIATIVES .................................................................................................. 79 

ANNEX 5: SME TEST ..................................................................................................... 89 

ANNEX 6: THE ECOSYSTEM OF ESG RATINGS ...................................................... 93 

ANNEX 7: GLOBAL REVIEW OF ESG RATING INITIATIVES ................................ 98 

ANNEX 8: INCORPORATION OF ESG FACTORS INTO CREDIT RATINGS ....... 106 

ANNEX 9: OPTIONS DISCARDED AT EARLY STAGE ........................................... 117 

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ANNEX  10  ADDITIONAL  EXPLANATIONS  AND  CHANGES  INTRODUCED 
FOLLOWING THE OPINION OF THE REGULATORY SCRUTINY BOARD 121 

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Glossary 

Term or acronym 

Meaning or definition 

CMU 

CRA 

CSRD 

DG FISMA 

Double Materiality 

ESAP 

ESG 

ESMA 

EU 

IOSCO 

KPIs 

SFDR 

SMEs 

UN 

Capital  Markets  Union,  a  plan  of 
the  European 
Commission to create a single market for capital. The aim 
is  to  get  money  –  investments  and  savings  –  flowing 
across the EU so that it can benefit consumers, investors 
and companies, regardless of where they are located. 

Credit Rating Agency 

Corporate Sustainability Reporting Directive 

European Commission Directorate-General for Financial 
Stability, Financial Services and Capital Markets Union 

Requirement  for  undertakings  to  report  both  on  the 
impacts of the activities of the undertaking on people and 
the  environment,  and  on  how  various  sustainability 
matters affect the undertaking. 

European Single Access Point 

Environmental, Social and Governance 

European Securities and Markets Authority 

European Union 

International Organization of Securities Commissions 

Key Performance Indicators 

Sustainable Finance Disclosure Regulation 

Small and medium-sized enterprises 

United Nations 

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1.  INTRODUCTION: POLITICAL AND LEGAL CONTEXT  

This initiative is part of the Strategy for financing the transition to a sustainable economy1, published 
in July 2021. It follows work initiated in 2018 with the Action Plan: Financing Sustainable Growth2. 
This forms parts of the actions proposed by the European Commission to contribute to the objectives 
of the European Green Deal3 by improving the flow and quality of information on the basis of which 
investors,  businesses  and  other  stakeholders  take  decisions.  These  decisions  in  turn  influence  the 
transition to a sustainable economy. At the same time this intitaive will contribute to ensuring the 
integrity of financial markets and enhancing investor protection. 

WHAT IS THE LEGAL AND POLICY CONTEXT? 

ESG/sustainable  investing  or  investing  which  takes  ESG  factors  into  account  when  making 
investment  decisions,  is  becoming  an  important  part  of  mainstream  finance,  with  some  estimates 
putting it at USD 40 trillion globally.4 Notably, investment funds with sustainable characteristics or 
objectives have largely increased in number, size and the type of capital they attract.5 In this context, 
an ESG investment ecosystem has developed, comprising investors, investees, data and other service 
providers who cater to  the needs of  these and other types of users. The  offerings of such service 
providers  can  be  broadly  grouped  into  ESG  data  (raw  or  processed),  ESG  ratings6,  other  ESG 
assessment tools (such as screening tools, rankings, controversy alerts), and advisory and consulting 
services  (such  as  regulatory  reporting  tools  for  the  Sustainable  Finance  Disclosure  Regulation 
(SFDR)7 and EU Taxonomy Regulation8). 

The EU has put in place the building blocks for a sustainable finance framework9 and 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. Much stakeholder feedback 
in recent years has focused on ESG rating and data providers. ESG rating providers and data providers 
use information published by corporates; as such, the availability, accuracy and consistency of this 
data are key to the quality of the downstream products that depend on it. The advent of the Corporate 
Sustainability  Reporting  Directive  (CSRD)10  in  the  EU  and  the  introduction  of  mandatory 
sustainability  reporting  standards  for  large  companies  are  expected  to  improve  the  availability, 
accuracy but also consistency of ESG corporate data. 

ESG  ratings  will  however  build  on  and  complement  that  and  continue  to  play  an  important  and 
enabling role for the proper functioning of the EU sustainable finance market by providing important 

1 Strategy for financing the transition to a sustainable economy, COM/2021/390 final. 
2 COM/2018/097 final. 
3 European Green Deal. 
4 OECD (2020), OECD Business and Finance Outlook 2020: Sustainable and Resilient Finance, OECD Publishing, Paris. 
5 European Investment Funds Study 2022 - Sustainable funds: from niche to mainstream. 
6 See IOSCO set of recommendations, definition of ESG ratings : “the  broad  spectrum  of  ratings  products  that  are  
marketed  as  providing  an  opinion regarding an entity, a financial instrument or a product, a company’s ESG profile or 
characteristics or exposure to ESG, climatic or environmental risks or impact on society and the environment that are 
issued using a defined ranking system of rating categories”. 
7 Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector, OJ L 317, 9.12.2019, 
p. 1–16. 
8  Regulation  (EU)  2020/852  on  the  establishment  of  a  framework  to  facilitate  sustainable  investment,  OJ  L  198, 
22.6.2020, p. 13–43. 
9 These building blocks are: 1) a classification system, or ‘taxonomy’, of sustainable activities, 2) a disclosure framework 
for non-financial and financial companies, and 3) investment tools, including benchmarks, standards and labels. 
10 Directive (EU) 2022/2464 as regards corporate sustainability reporting . 

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information  for  investment  strategies,  risk  management  and  internal  analysis  by  investors  and 
financial institutions. They are also used by companies who seek to better understand sustainability 
risks and opportunities linked to their activities or those of their partners, and how they compare to 
their peers on these issues. R 

ESMA11 has estimated the number of ESG rating providers (offering subscriber pay or issuer pay 
ratings) operating in the EU to be 59, composed of a few large (mainly non-EU) providers and a large 
number of smaller (mainly EU) entities. According to ESMA’s assessment, the estimated market size 
of ESG rating providers based in the EU is EUR 300 million. Given that the majority of large ESG 
rating providers are based outside the EU (while offering services in  the  EU), this number likely 
largely underestimates the total size of the market. Annex 6 provides further detailed information on 
the ESG ratings ecosystem, including market players and users. 

A number of papers have  highlighted the importance  and expected  growth of  the market  of  ESG 
ratings. It is expected to continue to grow substantially12 in the coming years13. Growth and increase 
in  demand  for  ESG  ratings  is  driven  by  the  changing  nature  of  risks  to  companies,  by  growing 
investor  awareness  of  the  financial  implications  of  those  risks  and  by  the  growth  in  investment 
products that explicitly seek to meet certain sustainability standards or achieve certain sustainability 
objectives.14  It  is  also  driven  by  the  change  in  strategies  applied  by  investors,  from 
negative/exclusionary screening to ESG integration, which is now predominant (USD 25.2 trillion in 
assets  under  management  employing  an  ESG  integration  approach,  while  negative/exclusionary 
screening  amount  for  USD  15.9  trillion  in  2020)15.  It  is  also  linked  to  the  sustainable  finance 
legislation put forward by the EU, since 2018. A survey conducted by Ninety One16 found that 88% 
of investment professionals use third-party ESG ratings as a part of their investment process, with 
92%  expecting  to  do  so  in  the  future.  As  a  result,  ESG  ratings  have  an  important  effect  on  the 
allocation of capital by investors to companies. ESG ratings  are one of the determining factors of 
whether company shares will be included in ESG-themed mutual or exchange-traded funds. With the 
growth of interest of investors in ESG ratings there is also an expectation that companies with a high 
ESG rating will be able to lower their cost of capital whereas the cost of capital of firms without ESG 
/ with a bad ESG rating is expected to increase, which in turn is supposed to steer more capital into 
sustainable activities. Investors currently cannot learn much from the ESG ratings and cannot clearly 
separate  ESG  high  performers  from  low  performers,  which  hampers  such  process  of  capital 
allocation. 

The  issues  facing  ESG  ratings  are  highly  relevant  for  the  Union’s  long-term  objectives  and  in 
particular the green transition, a key element of the Commission Strategic Foresight17, that requires 
adjusting the EU’s economic policies towards greater sustainability and more circularity. Investment 
into sustainable projects by both the private and the public sector will be key. It is estimated, at lower 

11 ESMA Call for Evidence on ESG Ratings 
12 Environmentalanalyst, ESG data market could exceed $1.3bn in 2022, annual growth of 28% in the ESG data market 
(which includes ESG ratings) 
13 Environmental Finance, ESG data market (including ESG ratings) ‘to more than double, to $5bn'. 
14 According to the OECD  ESG Investing: Practices, Progress and Challenges, “in the US,  the current level of ESG 
investing is now over 20% of all professionally managed assets, at over USD 11 trillion”, while in Europe, “industry data 
related to a broader range of  ESG practices suggests the level is over USD 17 trillion.”  According to a report in the 
Financial Times, research carried out by PwC has predicted that “ESG funds will experience a more than threefold jump 
in assets by 2025, increasing their share of the European fund sector from 15 per cent to 57 per cent.”. 
15 Global Sustainable Investment Review 2020. 
16 See Ninety One survey here. 
17 Commission Strategi Foresight Report 2022 

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ends, that the twin transitions might need around EUR 650 billion euro annually. Targeted reforms 
and investments must address vulnerabilities at national and EU levels in order to increase the EU's 
resilience and facilitate the twin transitions (digitalisation and green transition). 

At  the  international  level,  the  International  Organization  of  Securities  Commissions  (IOSCO) 
published  a  report  containing  a  set  of  recommendations  in  November  2021  calling  for  the 
establishment  of  oversight  on  ESG  rating  providers,  their  operations  and  products18.  This  impact 
assessment carefully considers those recommendations. A number of jurisdictions have also started 
looking closely at this topic and are considering the next steps and whether and how to intervene (for 
example  the  United  Kingdom,  Japan  and  India)19.  A  more  detailed  overview  of  IOSCO 
recommendations and developments in other jurisdictions is included in Annex 7. 

Stakeholders and market participants call for improvements in the ESG ratings market, highlighting 
a  lack  of  transparency,  reliability  and  comparability  of  ESG  ratings,  and  raising  the  risk  of 
greenwashing for all users of those ratings, including retail investors20. Member States21 and MEPs 
have also called on the Commission to act on ESG ratings. Market participants have indicated22 that 
a better understanding of what ESG ratings assess and increased reliability of ESG ratings would 
enhance the trust in and credibility of this fast-growing market, thereby facilitating progress towards 
the objectives of the European Green Deal. 

Stakeholders have also pointed to the relevance of understanding how ESG factors influence credit 
ratings.  Both  the  2018  Sustainable  Finance  Action  Plan  and  the  2021  Strategy  on  Financing  the 
Transition to a Sustainable Economy acknowledged the importance of incorporation of ESG factors 
in creditworthiness assessments and asked ESMA for advice.  

It should be kept in mind that credit ratings and ESG ratings play different roles and serve different 
purposes. Credit ratings assess the risk of default of a company and should capture all the risks that 
may affect creditworthiness - including sustainability risks where relevant. Credit ratings are used by 
investors to  calibrate portfolio risk profiles  (including for investment  products) as  well as  for the 
calculation of prudential requirements under the EU’s Capital Requirements Regulation (CRR) and 
Solvency II, and play an important role in ensuring financial stability. Credit ratings are also used by 
the European Central Bank as one element in its open market operations. 

ESG ratings have different purposes and usage. Some assess exposures to risk stemming from E, S 
and  G  factors,  others  impacts  of  the  entity  on  the  outside  world,  or  still  others  may  assess  the 
compliance with international standards. There are currently no regulatory requirements in relation 
to the use of ESG ratings (as opposed to credit ratings) and they only play a limited, indirect role for 
financial stability. Due to the different functions of those ratings, the same company may receive a 
good credit rating and a bad ESG rating, or vice versa. 

18 IOSCO Recommendations. 
19 The United Kingdom is working on the introduction of a code of conduct (as a first step) and a regulatory framework 
with oversight of ESG rating providers in the longer term. India also published a consultation in January 2022, to establish 
a regulatory framework for ESG rating providers. The aim is to improve transparency and comparability concerning the 
metrics  used  in  ratings.  Japan  was  the  first  country  to  introduce  a  (draft)  code  of  conduct  for  ESG  data  and  ratings 
providers in July 2022. 
20 For example, see ‘Ratings that don’t rate - the subjective world of ESG ratings agencies’ 
21  For  instance  see  a  Position  paper  from  the  French  and  Dutch  financial  market  authorities:  Call  for  a  European 
Regulation for the provision of ESG data, ratings, and related services.  
22 Outreach activities, responses to the consultation from the Commission. 

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Credit Rating Agencies have been regulated since the financial crisis of 2008. They need to register 
with  ESMA  and  are  subject  to  a  number  of  organisational  requirements,  as  well  as  ongoing 
supervision by ESMA. The CRA Regulation has also introduced disclosure requirements in relation 
to methodologies and credit ratings as well as rating outlooks. In addition, in 2019, ESMA issued 
guidelines on disclosure requirements that include recommendations on how CRAs should present 
in their press releases which credit ratings have been impacted by ESG factors23.  

The 2021 renewed sustainable finance strategy24 acknowledged that credit rating agencies play an 
important  role  in  the  financial  system  by  assessing  the  credit  risk  of  financial  and  non-financial 
issuers. It indicated that stakeholders continue to express concerns around the lack of transparency 
on  how  credit  rating  agencies  incorporate  sustainability  factors  in  their  methodologies  and  that, 
subject to further assessment of the effectiveness of the existing measures by ESMA, the Commission 
would take action to improve transparency and ensure the inclusion of relevant ESG factors in credit 
ratings and credit outlooks, while ensuring methodological transparency. 

Following  the  adoption  on  the  renewed  sustainable  financne  strategy,  ESMA  carried  out  the 
assessment of the impact of those Guideline25s and, in  addition, reviewed how CRAs incorporate 
ESG  factors  in  their  methodologies.  In  addition,  the  last  few  years  have  brought  changes  and 
improvements as far as disclosure and incorporation of ESG factors in credit ratings are concerned, 
as some CRAs are now disclosing more that is required by the Regulation and ESMA Guidelines.  

The remaining shortcomings relate to two areas: 1) the rigorousness of the inclusion of ESG factors 
in CRA’s methodologies, and 2) the clarity of the disclosures made by CRAs (whether and how ESG 
factors were considered).  

Chapter  5.5  and  Annex  8  summarises  the  evidence  and  analysis  carried  out  by  the  Commission 
services and ESMA.  It  concludes that modification of Annex  I  of CRA  Regulation  together  with 
changes to the delegated act on methodologies can address the remaining shortcomings. 

2.  PROBLEM DEFINITION 

The central problem this initiative aims to address is that the market suffers from deficiencies and is 
not functioning properly, with users’ and rated companies’ needs regarding ESG ratings not 
being met and confidence in ratings undermined. 

This  problem  has  a  number  of  different  dimensions,  mainly  the  lack  of  transparency  over 
methodologies  of  ESG  rating  providers  and  clarity  on  how  they  operate,  in  particular  how  they 
manage potential conflicts of interests. Consequently, ESG ratings do not serve their purpose and do 
not sufficiently enable users, investors and rated companies to take informed decisions as regards 
ESG-related  risks,  impacts  and  opportunities.  Investors  are  reluctant  to  use  these  or  they  need  to 
complement or verify the conclusions from ESG rating providers with further in-house analysis. In 
general only the larger asset managers are in the position to have such in-house department, smaller 
investors lacking expertise and financial means to do so26. The lack of trust in ESG ratings stems 
from the absence of transparency on methodologies and clarity over the operations of ESG rating 
providers. A number of scandals have happened in this market, but they are not the main reason for 

23 CRAs and sustainability  
24  Renewed sustainable finance strategy 
25 ESG disclosures in Credit Rating Agencies  
26  "What  is  the  value  of  ESG  ratings  for  responsible  investors  in  allocating  capital  towards  sustainable  companies? 
Evidence from European institutional investors. " Huys, Mona.  

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the lack of trust. However, given the growth of this market they are likely to become more common 
in the future in the absence of regulation and supervision of the market. Rated companies also face 
difficulties,  to  understand  under  what  criteria  they  are  assessed.  Since  decisions  of  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. 

The degree of information provided to  clients  and rated entities varies among providers.  It is  not 
possible for investors to assess and compare the value of ratings (as a product) without sufficient 
information on their scope and quality. This is the ‘information asymmetry’ market failure. 

Market forces have not catalysed the creation of a standard or framework to be applied by ESG rating 
providers, at international, European or national level. There have been attempts by the market to 
establish  voluntary,  self-regulatory  standards  /  codes  of  conduct  mainly  on  their  operations  and 
transparency of methodologies, but none hast been successful. The standard that seems to have been 
the most successful  was  ARISTA 3.0,  established in  2004, a voluntary European standard on the 
quality and transparency of methodologies and processes used by ESG rating agencies. This standard 
is seemingly non-existent, as ESG rating providers chose not to apply it anymore  “due to lack of 
relevance, market awareness and recognition of the standard”27. Another standard that also got some 
traction at its launch was the Deep Data Delivery Standard28, which is meant to be used by asset 
managers  as  a  quality  assurance  when  contracting  with  ESG  rating  providers.  A  number  of  ESG 
rating providers initially joined it (MSCI, Vigeo Eiris, RepRisk, etc.). There is however no recent 
information as to whether this standard still exists, nor a list of members. 

27 See the Study, p. 26. 
28 ‘Deep Data Delivery Standard’. 

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In the absence of requirements related to transparency of methdologies and objectives of ESG ratings, 
this situation is unlikely to improve and to meet the needs of users. 

2.1. WHAT IS/ARE THE PROBLEMS 

The  deficiencies  in  the  current  ESG  rating  market  identified  in  this  section  reflect  the  principal 
findings of the Commission’s Study on Sustainability-related ratings, data and research (henceforth 
abbreviated as “the Study”)29, targeted consultation30, ESMA analysis31, the IOSCO Report on ESG 
Ratings and Data Products  Providers of November 202132 (‘IOSCO Report’) and other litterature 
review. Annex 2 provides a summary of all stakeholder consultations and their results. 

It is useful to make a distinction between problems for users of ESG ratings and problems perceived 
by rated entities. 

• 

Investors and companies observe issues with the reliability, accuracy and timeliness of ESG 
ratings; 

•  Rated companies are unsure how accurately ESG ratings reflect their actual performance and 

how to improve it. 

2.1.1.  INVESTORS  AND  COMPANIES  OBSERVE  ISSUES  WITH  THE  RELIABILITY,  ACCURACY 

AND TIMELINESS OF ESG RATINGS 

This problem analysis focuses on the primary intended users of ESG ratings : 

 

Investors  and  benchmark  administrators  increasingly  use  ESG  ratings  as  part  of  their 
sustainable  investment  strategies  to  take  into  account  risks  and/or  impacts  linked  to  ESG 
issues.  ESG  ratings  are  often  used  for  pre-investment  decision-making  (e.g.,  to  inform  a 
selection  of  equities  to  include  in  a  portfolio  or  fund),  post-investment  analytics  and 
attribution (e.g., to rate the ‘sustainability’ of an investment product or fund) or as a basis for 
investment  screening  or  for  company  engagement  (engagement  between  an  investor  as  a 
shareholder of a company, and representatives of the investee company which can influence 
decisions taken by the company’s management).  

  Companies use ESG ratings to look for and take account of operational risks and investment 
opportunities but also to see how they perform against ESG factors, compared to peers 33 ; 

ESG ratings have an increasing impact on the operation of capital markets and on the confidence of 
investors  in  financial  products.  Investors  however  denounce  a  lack  of  ‘quality,  effectiveness  and 
impact of corporate ESG ratings’34. 

Investors  and  companies  claim  that  ESG  rating  providers  do  not  gather  and  process  data  and 
information in an accurate, timely or reliable manner35; that their methodologies are opaque36 and 

29 Study on sustainability-related ratings, data and research. 
30 See Commission targeted consultation here. 
31 ESMA Call for Evidence. 
32 IOSCO Report on ESG Ratings and Data Products Providers. 
33 Marius Banke Stephanie Lenger and Christiane Pott, “ESG Ratings in the Corporate Reporting of DAX40 Companies 
in Germany: Effects on Market Participants”, 2022. 
34 Wong, Brackley, & Petroy, “Rate the Raters 2019: Expert Survey Results”, 2019. 
35 Evidence gathered from responses to the Commission consultation on ESG ratings. 
36 The Economist, 2019; Financial Times, 2020a,b. 

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do not sufficiently take into account company context37; that providers make errors (and are slow to 
correct them) and that engagement with multiple providers is time-consuming. There have also been 
companies suing ESG rating agencies for unfounded ratings, which has in turn created concerns about 
the accuracy of ESG ratings38. 

ESG rating providers however, generally mention that companies do not publish sufficiently reliable 
data to enable appropriate comparability and analysis, while at the same time asset managers demand 
increased coverage, depth but also data quality39. 

The Study noted that a number of ESG rating providers, including Bloomberg, CDP, FTSE Russell, 
ISS,  MSCI,  S&P  SAM  and  Trucost,  Workforce  Disclosure  Initiative,  Vigeo  Eiris  and 
Sustainalytics40,  utilise  company  verification  as  part  of  their  data  accuracy  process.  Company 
verification appears to be an effective tool used by ESG rating providers, but investors and companies 
find  it  difficult  to  navigate  given  the  variety  and  lack  of  clarity  over  the  processes  used.  Those 
providers may flag specific areas they want companies to review, including missing data, conflicting 
data  from  different  sources  or  a  large  change  in  data  between  years.  Increasingly  providers  are 
creating online platforms and individual company accounts as mechanisms for providing updates to 
companies and for companies to engage or ask questions. Some providers claim to have a continuous 
feedback  system,  but  others  only  enable  verification  on  an  annual  or  semi-annual  basis.  Some 
providers  don’t  engage  with  companies,  so  that  their  ratings  cannot  be  influenced  by  corporates. 
Therefore, there is a disconnect between what ratings providers say they offer, and the experience 
companies actually have with providers. The Study identified that only one ESG rating provider, out 
of 14 providers who responded to  a question on data verification  in the context of the Study, has 
detailed publicly available information on the data verification process41. Given the overall lack of 
information  available  publicly,  it  is  difficult  to  understand  whether  ESG  rating  providers  have 
effective methods in place for quality control and what those are, specifically how they deal with 
input data. There is no available evidence to support claims of functioning data verification. 

Furthermore, information on methodology and frequency of rating updates is also limited and varies 
depending on the ESG rating provider concerned42. The majority of ESG ratings providers typically 
update ratings annually, but the frequency with which they undertake methodological updates varies 
from potentially daily to “periodically.” Updates may also be linked to feedback from companies, 
e.g.  ISS  QualityScore  calls  on  companies  to  provide  updated  data  as  much  as  possible  via  their 
platform43. The Study noted clear differences in the updates to company ratings, which also affects 
the quality of ratings and whether information on companies is up-to-date or possibly outdated. 

2.1.2.  PROBLEMS FROM THE PERSPECTIVE OF RATED ENTITIES – UNSOLICITED RATINGS 

The  main  problem  from  a  rated  entity  perspective,  where  they  are  subject  of  ratings  but  not 
users/clients themselves, is that they find it difficult to understand whether and how they are rated, 

the  Munich  District  Court  banned 

37 Mackintosh (2018); Berg et al. (2020). 
38 Isra Vision, a German manufacturer of camera technology, sued ISS ESG, for assigning it the lowest “D-” ESG rating. 
Consequently, 
Isra  Vision. 
“Heavy flows into ESG funds raise questions over ratings” by Billy Nauman, Financial Times, March 4, 2020. 
39 Rate the Raters 2020: Investor Survey and Interview Results, p. 20. 
40 See for example ISS Data verification, MSCI data verification process. 
41 Refinitiv, Environmental, Social and Governance scores.  
42 Exception those using surveys (e.g. CDP, SAM CSA) that publish specific updates to methodology as well as annual 
ratings. 
43 ISS QualityScore FAQ. 

the  ESG  of 

ISS  ESG 

rating 

from 

11 

 
                                                 
or how to improve their performance and may face risks of using incorrect/unreliable ESG ratings, 
where they can also be subject to greenwashing accusations. 

Rated  entities  also  face  a  large  number  of  requests  at  different  times  from  different  ESG  rating 
providers (e.g., via questionnaires), which creates administrative burdens and costs.   

ESG  rating  providers  have  different  level  of  engagement  with  companies.  Although  several  ESG 
rating providers engage directly with companies to gather data and information (in addition to the 
ones publicly available), to facilitate data verification (via online platforms, direct exchanges, holding 
meetings or teleconferences), and to allow for error correction, grievance resolution, this is not always 
existent and practices including levels of engagement differ from one ESG rating provider to another. 
It is also not always clear to what extent the result of the engagement impacts the rating given to a 
company. Some providers don’t engage at all with rated companies and use only public data in order 
to remain objective. Few ESG rating providers publish some information on how they engage with 
issuers44. ESG rating providers may also organise frequent or annual exchanges/review process or 
allow companies to provide feedback using a specific application/portal, also prior to publication of 
the  ESG  rating.  Some  other  ESG  rating  providers  may  have  data  verification  process  based  on 
algorithmic checks, without human intervention45. 

The large number of exchanges between ESG rating providers and companies, and the time necessary 
for  these  exchanges  may  give  further  advantage  to  larger  companies  that  have  the  means  and 
resources both in terms of personnel and budget to exchange with ESG rating providers and provide 
data46. This is reinforced by research that shows that large-cap companies have significantly higher 
ESG  disclosure  scores  than  mid-cap  companies47.  Research  by  Environmental  Finance  states  that 
‘companies complain about the growing number of questionnaires they are being asked to respond 
to, and the confusing array of standards they are being asked to meet, including the Global Reporting 
Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Integrated 
Reporting Council (IIRC) and the Task Force on Climate-Related Financial Disclosures (TCFD)’48. 
The  Independent  Research  in  Responsible  Investment Survey  (IRRI)  of  201949  also  stressed  that 
completing  standardized  questionnaires  from  ESG  rating  providers  is  the  most  time-consuming 
activity for companies. This reflects the same result as in prior years. The Study noted that as a result 
much less time is spent on proactive and direct communications and answering focused questions 
from asset managers and financial analysts. 

Finally,  information  which  is  made  available  to  companies  subject  to  ESG  ratings  is  unclear  and 
diverse50.  It  is  also  difficult  to  find  information  online  on  whether  ESG  rating  agencies  charge 
companies to see their own report, although it appears from larger ESG rating providers’ websites 
that access is free of charge51. Details of the information available to companies are also absent and 
it is understood from  exchanges with  stakeholders that it  varies  from one ESG rating provider to 
another. It also depends on the approach taken by the ESG rating provider, as some don’t engage 

44 E.g. MSCI ESG General FAQs for Corporate Issuers, Sustainalytics, The esg risk rating: frequently asked questions – 
for companies. 
45 E.g. Refinitiv. 
46 Samuel Drempetic, Christian Klein and Bernhard Zwergel, ‘The Influence of Firm Size on the ESG Score: Corporate 
Sustainability Ratings Under Review’, Journal of Business Ethics, 2020.   
47 N. Tamimi and R. Sebastianelli, ‘Transparency among S&P 500 Companies: An analysis of ESG Disclosure Scores’, 
Management Decision, Volume 55, Issue 3, January 2017. 
48 Peter Cripps, 'ESG Data Files - part one, continued: reported data,' Analysis, Environmental Finance, 3 July 2019.  
49  Extel  and  SRI-Connect,  Independent  Research  in  Responsible  Investment  Survey  2019,  SRI-Connect,  2019. 
Approximately 50% of participating companies were from EU member states. 
50 See for example ‘The ESG Risk Rating: - Sustainalytics’. 
51 MSCI ESG General FAQs for Corporate Issuers.  

12 

 
                                                 
with  companies,  seeing  their  role  as  advisors  of  financial  institutions  and  stressing  that  the 
engagement should be made by the financial institutions which made investment decisions. 

2.1.3.  CONSEQUENCES 

There are several consequences of this problem which have one element in common – the ability of 
investors, businesses and other stakeholders to use and rely on ESG ratings for their decisions related 
to sustainability. Some of the consequences are common to all types of stakeholders while others are 
more specific to their individual needs. 

The consequences of the problems from a user perspective are: 
1. 

Investors are unable to take sufficient account of sustainability-related and other non-financial 
risks and opportunities in their investment decisions, 
Investors are also less able to channel financial resources to companies and economic activities 
that address and do not exacerbate social and environmental problems, 

2. 

3.  Benchmark administrators construct benchmarks based on ESG ratings where they do not have 

fully clarity over how they were computed,52 

4.  Companies cannot consider all potential risks and opportunities from their activities and channel 

investments accordingly. 

The specific consequence from a rated entity perspective is that they may receive an ESG rating 
in relation to elements that are outdated, or incorrect, which can impact the terms of their access to 
finance. 

The  specific  consequence  from  other  stakeholders’  perspective  is  that  non-governmental 
organisations, trade unions and other stakeholders are less able to hold companies accountable for 
their impacts on society and the environment. 

The  problems  have  negative  consequences  for  the  functioning  of  the  EU  sustainable  finance 
market, leaving a gap in the EU sustainable finance framework that was established to provide more 
transparency  and  the  tools  for  private  capital  to  flow  to  sustainable  investments  that  are  urgently 
needed  for  the  transition.  The  wider  consequences  are  that  the  potential  of  the  European  Single 
Market to contribute to the objectives of European Green Deal, and to the achievement of the UN 
Sustainable Development Goals, is not fully utilised.  

2.2. WHAT ARE THE PROBLEM DRIVERS 

There are two main but complementary problem drivers, further detailed below: 

1.  Lack of clarity on the charateristics of ESG ratings, their methodologies and their data 
sources (this includes how they are created and disclosure/transparency on these), and 

2.  Lack of clarity about and control of operations of ESG rating providers. 

Users  of  ratings  suffer  from  imperfect  information,  and  it  is  not  possible  for  them  to  assess  and 
compare the value of ratings (as a product) without sufficient information on their scope and quality. 
ESG rating providers do not have incentives to be as transparent as users would like them to be, as 
the former perceive commercial value in their methodologies.  

53 Huys, Mona, op.cit. 

13 

 
 
 
                                                 
2.2.1.  PROBLEM  DRIVER  1:  LACK  OF  CLARITY  ON  THE  CHARACTERISTICS  OF  ESG 

RATINGS, THE METHODOLOGIES USED AND DATA SOURCES 

The  first  problem  driver  captures  two  main  issues,  (a)  the  lack  of  transparency  on  rating 
methodologies  and  (b)  the  lack  of  clear  and  consistent  terminology,  including  the  lack  of 
understanding of what ESG ratings measure. 

There is a notable demand for greater transparency of objectives, methodologies adopted and quality 
assurance processes in place by ESG rating providers that is currently not met53. Users fail to be able 
to make informed decisions and lack trust in the market. According to IOSCO’s report, the lack of 
transparency is “a key factor in encouraging users to build proprietary rating methodologies”,54 even 
though  external  ESG  ratings  should  in  principle  save  time/cost  to  users.  This  creates  a  market 
inefficiency, which could  produce consequences for sustainable investment  at  large. On the other 
hand, market participants should not entirely rely on external ESG ratings, as this may also lead to 
market inefficiencies, as it has happened in the past in the market of credit ratings. 

Without sufficient transparency of the methodology adopted, it is not possible to assess how effective 
they have been in evaluating a company, or whether the selected criteria align with the sustainability 
objectives of the user55. A lack of transparency leads to a lack of understanding as to what the rating 
represents. This may lead to misuse of ESG ratings, if taken without making own judgements and 
additional analysis56. This is particularly true for passive investing, where investors do not actively 
manage individual securities but track a market-weighted index or portfolio that can be built based 
on ESG rating characteristics. 

a.  Lack of transparency on rating methodologies 

o  Overall lack of transparency of ESG rating methodologies 

Investors,  companies  and  other  stakeholders  face  difficulties  to  understand  how  ESG  ratings  are 
computed and what criteria and assumptions are taken into account5758. They find that ESG ratings 
lack understandability and are too complex59. At the same time, they welcome the diversity in the 
offering of ESG ratings60 and what they seek most in an ESG rating is the depth and breadth of data 
coverage61. 

The majority of publicly available methodology documents (which some ESG rating providers make 
available, while others do not) only cover their general approach to ratings, key sustainability-related 
issues  or  topics  leveraged  and  some  information  on  their  scoring  methodologies.  The  Study 
demonstrated that few providers disclose the underlying indicators that feed into specific topics or 
the actual weights of the sustainability-related topics or issues based on industry. Information is very 

53 Huys, Mona, op.cit. 
54 IOSCO Report, p.27. 
55 Tang, Yan and Yao, 2022, op.cit. 
56 ESG ratings should be treated as a starting point and should not be taken for granted (Bos, 2020). 
57  Tang,  Yan  and  Yao,  2022,  op.cit.  :“The  issue  of  limited  transparency  in  the  ESG  rating  processes  ranges  from 
indicators and algorithms to the qualitative proprietary assessment techniques applied”. 
58 IOSCO report, p. 4; stakeholders’ feedback to Commission consultation. 
59 ESMA letter on ESG ratings, p. 3. 
60 The results of the targeted consultation show 65% of respondents welcome variety of types of ESG ratings. 
61 ESMA letter on ESG ratings, p. 18. 

14 

 
 
                                                 
diverse and in the absence of homogeneity it is difficult for users to understand and compare ESG 
ratings. 

In  October  2022,  in  light  of  the  developments  and  discussions  around  ESG  ratings  and  their 
transparency, a large ESG rating provider decided to publish, for free, on their website, methodology 
documents  describing  the  calculations,  data  inputs,  and  processes  followed  to  maintain  ESG 
methodologies62.  The  methodology  documents  are  divided  between  core  documents  and  issue 
specific documents (e.g. biodiversity and land use, packaging materials and waste key, human capital 
development, business ethics, etc.). It clarifies that the methodology documents are not intended to 
provide an exhaustive description of all inputs, data sources, or derived calculations used to arrive at 
the final assessment. Rating reports of companies however, given the nature of their business model 
- user (investor pay) - are behind a paywall. Disclosures for other market participants are very diverse, 
ranging from a high-level summary / introductory document such as FTSE’s ESG Ratings and data 
model63,  Sustainalytics  risk  ratings64,  to  more  detailed  information  and  paper  from  Refinitiv  (20 
pages+) detailing the breakdown of the components that go into their rating65. 

Users of ESG ratings also find it difficult to understand what industry or sector classification was 
used and how it affects the rating. The Study identified that the majority of ESG ratings (with the 
exception RepRisk) use some level of industry or sector specification (such as SASB, GRI and/or 
(TCFD66), but the degree to which rating provider methodologies cater to industry-specific issues 
varies67. One provider uses the same general bank of topics when scanning for controversies across 
all companies, irrespective of industry specifics. Hence, important industry-specific characteristics 
may be left out, which could also complicate comparison of companies from such industry based on 
ratings.  Other  concerns  have  been  expressed  with  the  fact  that  should  companies  subject  of  ESG 
ratings not respond in full to questionnaires sent to them by ESG rating providers, then they would 
get a bad rating for those questions left unanswered68. 

There is also limited information on how certain key elements such as company controversies, press 
information  or  allegations  are  factored  in  an  ESG  rating  and  whether  and  how  they  are  duly 
considered. The Study noted that the controversy scan process is updated more regularly (e.g., daily 
or weekly) than a company’s final ESG rating but the processes diverge. The majority of ESG rating 
providers  have  unique  methodologies  for  assessing  and  incorporating  company  exposure  to 
controversies  into  their  scoring  frameworks69,  but  information  publicly  available  online  is  very 
limited or non-existent. Companies have also complained that some ESG rating providers still take 
into account  controversies based on old  and outdated information,  impacting their  final rating.  In 
addition, ESG rating providers would not always inform companies, give clarity as to whether and 

62 MSCI ESG Methodologies. 
63 FTSE Russell, ESG Ratings and Data Model Product Overview: Integrating ESG into Investments.  
64 Sustainalytics ESG Risk Ratings- Methodology Abstract. 
65 Refinitiv, Environmental, Social and Governance (ESG) Scores from Refinitiv, April 2020. 
66 https://www.sasb.org/, https://www.globalreporting.org/, https://www.fsb-tcfd.org/. 
67 CDP, ISS-ESG, SAM CSA, Sustainalytics, and Vigeo Eiris provide highly customized, question-level differences on 
issues and metrics within their frameworks depending on company sector. MSCI, ISS QualityScore, FTSE Russell and 
Refinitiv include the same starting universe of topics or metrics with refinements based on industry. 
68  Berg,  Koelbel,  and  Rigobon,  “Aggregate  Confusion:  The  Divergence  of  ESG  Ratings”,  Forthcoming  Review  of 
Finance, 2019.  
69 For example, MSCI ESG Controversies and Global Norms Methodology. 

15 

 
                                                 
how a controversy is being dealt with; instead, companies need to be proactive and check regularly 
what information is available on them online70. 

Only a limited number of ESG rating providers71 also make their ESG ratings publicly available. All 
other  providers  have  established  some  form  of  paywalls,  either  through  their  own  self-developed 
platform and/or via a paid Bloomberg subscription, which limit ESG ratings access to subscribers. 

o  Concerns and effects of biases and low-correlation of ESG ratings 

The  lack  of  understanding  over  ESG  ratings  by  users  and  issuers  is  also  affected  by  biases  and 
concerns over low correlation between ESG ratings, which are well documented in literature72. 

The  first,  and  most  commonly  referenced  concern,  refers  to  company  size  bias,  where  larger 
companies  with  high  market  capitalisation  may  obtain  higher  ESG  ratings  while  not  necessarily 
demonstrating a better performance in economic, social or governance factors, because of the ability 
to dedicate more resources to non-financial disclosures73. Company size bias appears to be mainly 
based on larger companies having the resources to prepare and disclose more sustainability-related 
information  than smaller companies74.  Larger  companies often have in-house sustainability teams 
and  have  the  financial  means  to  hire  specialized  consultants  to  support  them  develop  targeted 
sustainability-related  disclosures.  A  study75  stressed  that  the  way  ESG  rating  providers  measure 
company  sustainability  gives  an  advantage  to  larger  companies  with  more  resources,  while  not 
providing  investors  with  adequate  information  needed  to  make  decisions  based  on  sustainability-
related  factors.  Another  study  from  Berenberg76  compared  the  coverage  of  the  three  largest  ESG 
rating  providers  to  examine  data  gaps  in  2020  and  found  that  ESG  ratings  are  inherently  skewed 
towards large and more mature companies, while small and rapidly growing companies on average 
have lower ESG ratings. 

Geographical bias is the second point of concern, that can also be very diverse in form. For example, 
where there is a geographical bias toward companies in regions with stronger  reporting requirements. 
Other geographic biases can be where ESG ratings are influenced by the geographic location of the 
rated firm and the firm’s industry type77. Lastly, there can also be geographic biases where some ESG 
ratings  would  also  be  influenced  by  the  country  of  origin  of  ESG  rating  providers78.  European 
companies are also required under the CSRD and the EU taxonomy to establish sustainability reports 
and reports on specific ESG factors, while this might not be the case in other parts of the world79.  

70 Leaders Arena, why are ESG controversies so controversial & what can companies do about them? 
 “As  with  ESG  Ratings  in  general,  the  ESG  controversies  approaches  by  leading  providers  table  highlights  key 
differences between agencies. Simply put, what is considered as a controversy by one agency, may not be by another, 
and severity grading also varies. It is also often unclear the impact of a controversy on the overall company ESG score”.  
71 Sustainalytics ESG Ratings, CDP Scores, Standard Ethics Corporate Rating, ESG Ratings Climate Search Tool. 
72 Giese et al., 2019; Ratsimiveh et al., 2020, Kotsantonis and Serafeim, 2019. 
73 Melas, Nagy, and Kulkarni, “NN Investment Partners and ECCE’s study”, 2016. 
74 Samuel Drempetic et al. (2020), op.cit. 
75 Ibid. 
76 Matthias Born, Katharina Raatz, Dr Rupini Deepa Rajagopalan and Justus Schirmacher, ‘ESG Ratings: The Small and 
Mid-cap Conundrum’, Research paper, Berenberg, May 2020.  
77 Gyonyorova et al., 2021. 
78 Aaron Chatterji, Rodolphe Durand, David Levine, and Samuel Touboul, “Do Ratings of Firms Converge? Implications 
for Strategy Research”, Strategic Management Journal, 2016. 
79 Hawley, 2017. 

16 

 
                                                 
ESG rating providers, because of their location, would also put emphasis on certain aspects more 
than on others (e.g. more weighs on social issues) or consider different dimensions80. 

A third concern is industry bias, where differences in business models are not accurately captured in 
composite ratings. Some sectors may also be given low scores on average81. 

The  lack  of  understanding  and  clarity  over  methodologies  has  also  raised  concerns  over  low 
correlation (also referred to as divergence) of ratings, where companies may get different ESG ratings 
for  what  appears  to  be  identical/similar  dimensions.  One  of  the  likely  explanations  for  such  low 
correlations is the lack of transparency82 and absence of clarity over what ESG ratings measure83, 
how they are computed and their specific objectives84. It is also because of the different ways ESG 
rating providers assess ESG elements and, depending on what they consider relevant, include those 
in their computations. Stakeholders understand ‘E’, ‘S’ and ‘G’ differently, and there is a subjective 
nature in the way sustainability and the materiality of ESG categories is assessed. 

The main divergences are (i) scope divergence, for the selection of the sets of material categories, (ii) 
weight  divergence,  with  the  importance  given  to  each  ESG  category,  and  (iii)  measurement 
divergence, with the use of different indicators to explain the same attribute, or to measure the same 
ESG  criteria85.  The  same  study  indicates  that  measurement  (which  includes  definitions  and 
indicators)  contributes  56%  of  the  divergence,  scope  38%,  and  weight  6%.  According  to  another 
study,  the  main  source  of  divergence  would  be  measurement  divergence,  explaining  50%  of  the 
divergence86. 

In the absence of clarity to users, the latter may take ESG ratings at face value without digging more 
into the specifics. Divergences across ESG ratings that have different data points, assumptions and 
objectives, where stakeholders are clearly informed about these, should not be a problem, as they are 
effectively different ratings. As part of their job, institutional investors analyse the differences in ESG 
ratings  across  providers,  to  identify  that  which  is  best  for  their  strategy  and  meets  their  clients’ 
demands. ESG ratings are used to supplement asset managers and asset owners in-house research, 
including engaging with companies directly, to form their own opinion on sustainability performance. 
Differences in approach across ESG rating providers also reflect investor diversity, needs and the 
varying focus or priorities across investors. However, low correlation between ESG ratings that have 
similar/identical data points and objectives should in principle not exist. 

b.  Lack  of  clear  and  consistent  terminology  and  lack  of  understanding  of  what  ESG  ratings 

measure 

There is a lack of clear and consistent terminology used among ESG rating providers and a need for 
a  clearer  and  standardized  definition  of  what  an  ESG  rating  or  an  ESG  score  means  and  what  it 
effectively captures. 

80 Chatterji, Durand, Levine and Touboul, 2016, op. cit. 
81  Fabio  Alessandrini  and  Eric  Jondeau,  “ESG  Investing:  From  Sin  Stocks  to  Smart  Beta”,  Journal  of  Portfolio 
Management, 2020. “These scores may suffer from industry biases. For instance, the energy sector is given a particularly 
low score on average according to the environmental criterion”, p. 6. 
82 Dimson, Marsh and Staunton, 2020, Lopez, Contreras and Bendix, 2020. 
83 Commission targeted consultation - Lack of transparency and clarity most important factor for low-correlation. 
84 ESG investing, issues and challenges 
85 Berg, Koelbel, & Rigobon, 2019, op. cit. 
86 Chatterji, Durand, Levine, & Touboul, 2016, op.cit. 

17 

 
                                                 
 
o  Lack of clear and consistent terminology 

The notion of ESG rating is applied in an inconsistent manner by market participants, which creates 
confusion and a lack of clarity for users as to what is effectively in scope or not. 

In its set of recommendations published in November 2021, IOSCO defined ESG ratings with a wide 
scope, as  “the  broad  spectrum  of  ratings  products  that  are  marketed  as  providing  an  opinion 
regarding an entity, a financial instrument or a product, a company’s ESG profile or characteristics 
or exposure to ESG, climatic or environmental risks or impact on society and the environment that 
are issued using a defined ranking system of rating categories, whether or not these are explicitly 
labelled as ‘ESG ratings’”. This is the first definition established by an international institution. It is 
critical that this definition does not limit the scope to those services that are labelled strictly as ‘ESG 
ratings’, as otherwise services with the same characteristics could be omitted and the objective of this 
initiative to bring transparency to the market over those services would be hampered. Services that 
have the same attributes should be captured. This definition also refers to the notion of ‘opinion’ and 
it is important to clarify for the purpose of this work what this captures. 

The market generally uses the term  ‘ESG rating’ where there is a process involving an analyst, a 
human role in the process, but also some form of rating committee, overseeing the application of 
principles in the organisation. In such scenario, the ESG rating providers use both quantitative and 
qualitative data, with the rating as an outcome. 

A number of ESG services providers87 also offer so-called ‘ESG scores’, which they consider are 
different from a rating as there is no involvement of an analyst, of a person. ESG scores are based on 
automated quantitative analysis, set-up through an algorithm. Even if they could be considered as 
having some specific attributes, again because no analyst and personal judgement/opinion is given 
during the rating process and over input data, they are to fall within the broader definition of ESG 
ratings for the purpose of this impact assessment. ESG scores are effectively the same output and are 
used the same way and for the same purpose by users and should benefit from greater transparency 
over their methodology. Automated quantitative analysis is also based on some human intervention 
where choices have been made at the initial stages of the process on what data to take into account, 
under what circumstances, and on the respective weights. IOSCO in its set of recommendations also 
captures ESG scores in the definition of ESG ratings88. 

In terms  of object  and actual use of ESG ratings, the majority of  them are used in  the context of 
investment decisions, by institutional investors, either to directly feed into the construction of the 
portfolio  or  as  the  input  into  the  investment  decision  process,  or  via  the  construction  of  the 
benchmarks or as an input into the internal analysis or internal rating process. There are also ESG 
ratings used directly by companies, at their request, where they aim to assess risks or opportunities, 
or for contractual  purposes, for example  when the company  asks  for the assessment of its supply 
chain (e.g., EcoVadis89). 

o  Lack of clarity over what ESG ratings measure 

There  is  confusion  about  coverage  of  E,  S,  G  matters.  Some  ESG  rating  providers  cover 
Environmental, Social and Governance criteria collectively, while others are very much specialised 
to individual ‘E’, ‘S’ or ‘G’ aspects. In general, larger rating providers cover the broad ESG spectrum 

87 E.g. Bloomberg 
88 See IOSCO Report, p. 10. 
89 See information from Ecovadis on ESG ratings of supply chain. 

18 

 
                                                 
(e.g., S&P, MSCI, Sustainalytics), while smaller providers focus on individual aspects or even topics 
within these (e.g., Carbon4 Finance with climate related risks). 

Aggregated ESG ratings may be considered as also lacking clarity regarding what element – ‘E’, ‘S’ 
or ‘G’ or a subset of either – drives the final rating to the highest degree. Hence, an investor may 
choose to buy shares or bonds in a company based on a good overall rating, whereas such company 
could be only performing well in one aspect and have poorer performance on other aspects which 
may be of more relevance to such investor. Without sufficient clarity on the criteria selected, weights 
used, if arithmetic or geometric average is used (allowing or not compensation between dimensions), 
an investor may not be able to make sufficiently well-informed decisions and may be misled by the 
overall rating. Aggregated ESG scores may not provide relevant information and could be detrimental 
for prudent decision making.90 This creates a potential for greenwashing. 

ESG ratings and scores can also be grouped into several categories based on what they are measuring. 
The Study noted that the most common and widely used form is ESG risk ratings (e.g., MSCI), which 
measure a company’s exposure to ESG risks and management practices. There are also ESG ratings 
considering impact from companies on the environment and society (so-called ‘double materiality 
principle’):  these  (e.g.,  Impak  Finance,  Carbon4  Finance)  measure  the  impact  of  an  entity  on  the 
environment in general, on society and/or on some given metrics. Beyond those two groups there are 
a number of other ratings that measure aspects like disclosure, or a specific issue, for example supply 
chain (e.g., Ecovadis). The most prevalent issue-focused ratings are climate-related ratings, but even 
these look at different aspects, such as climate physical and/or transition risk (e.g., Carbon4 Finance), 
greenhouse gas emissions or carbon capture. As already mentioned above, diversity in offerings of 
ESG ratings is not a problem and is welcomed by users of ratings, but they also need clarity and be 
certain as to the object of ratings they buy. They may think they are buying some ESG rating looking 
into impacts on the environment/society, while effectively it only analyses the financial risks of a 
company91. 

Each ESG rating provider is different and may also use terms like ‘topics’, ‘themes’ or ‘issues’ to 
indicate areas that they consider when evaluating sustainability or ESG risk exposure or impact. Issue 
selection  is  ultimately  up  to  the  rating  provider,  and  this  is  where  differences  in  methodological 
approaches,  and ultimately differences in  the  final  company  rating, start  to appear.  Most users of 
ratings  are  unable  to  access  the  information  at  hand  to  know  of  all  the  themes/issues  taken  into 
account and are vulnerable to being misinformed92. In the current market, the ratings are presented 
as ESG ratings regardless of whether they cover only distinct parts or the full set of the ESG factors. 

The Study stressed that once a set of issues has been identified, ESG rating providers will then select 
specific  indicators,  metrics  or  KPIs  that  measure  performance  against  an  identified  issue.  For 
example, one may have identified ‘climate change’ as a relevant issue to consider and use ‘carbon 
emissions’ as the corresponding indicator to evaluate a company’s performance on that issue. While 
there is some overlap, the number and type of issues and indicators varies by ESG rating provider 
and should always be considered on a case-by-case basis by the user of the rating. The most consistent 
measurements tend to be in the ‘Environmental’ category, such as greenhouse gas emissions, energy 

90 2DegreesInvesting - Do we speak the same language? A market survey on the future of ESG ratings. 
91  ‘The  ESG  Mirage’,  Bloomberg,  2021,  “This  critical  feature  of  the  ESG  system,  which  flips  the  very  notion  of 
sustainable  investing  on  its  head  for  many  investors,  can  be  seen  repeatedly  in  thousands  of  pages  of  MSCI’s  rating 
reports.”.  
92 ESMA Call for Evidence, page 20, section 37, 63% of respondents argued that the level of methodological transparency 
is still not satisfactory. 

19 

 
                                                 
consumption, waste disposed, etc.93. Consistency in other topics, in particular ‘social’ tends to be 
more difficult. Units of measurement for each indicator can vary across ESG reports and surveys 
(sometimes depending on the country). Many ESG rating providers do not necessarily use all of the 
indicators collected on a given company in the final rating, instead, they will make a decision as to 
which indicators are most relevant for a company in their opinion, based on which industry or sector 
the  company  fits  within.  Given  this  choice  from  ESG  rating  providers,  and  the  absence  of 
transparency of methodologies, users may find it difficult to trace back characteristics of ESG ratings 
and exactly what criteria was selected, for what purpose. 

2.2.2.  PROBLEM DRIVER 2: LACK OF CLARITY ABOUT, AND CONTROL OF, OPERATIONS OF 

ESG RATING PROVIDERS 

ESG ratings  providers  currently do not have to comply  with any rules  in order to  offer their 
services  in  the  EU,  including  on  their  organisation/operations  (i.e.  there  is  no  authorisation, 
registration or supervision) neither at national, European or international level, unlike other financial 
services actors, such as credit rating agencies94, benchmark administrators95, asset managers96. 

Users, companies and other stakeholders face difficulties in understanding how ESG rating providers 
are structured, organised, and how the independence of their methodology and overall operations are 
guaranteed.  This contributes to creating an overall lack of trust in the market but also potential risks, 
including of greenwashing and socialwashing. 

One of the key issues relating to this concerns potential conflicts of interests, and the need for more 
robust governance arrangements. 

The Study identified that there are four primary potential conflicts of interest, relating to ownership, 
product mix, separation of commercial and analytical teams, and methodology governance.  

Regarding  ownership,  the  Study  mentioned  that  ownership  raises  a  conflict  of  interest  if  not 
considered  independent  from  the  companies  subject  to  evaluation.  For  example,  if  the  parent 
company of the rating provider owns a portfolio of other companies rated by the rating provider, it 
could be perceived as influencing the rating provider. It also concerns ‘sister firms’ of ESG rating 
providers that may receive higher ratings from the affiliated ESG rating provider than they do from 
independent firms. An empirical study97 also found that a rater may have ‘more incentives to provide 
favourable treatments to sister firms held by multiple blockholders than those sisters held by single 
blockholders. Second, it may also be the case that if a large shareholder of the rater is powerful and 
influential in terms of asset under management, it may create more incentives to assign higher ratings 
to the large shareholder’s holding firms'. This study also noted that ESG rating providers may have 
some incentives for inaccurate ESG ratings in order to establish or maintain a good reputation, or 
because of relationships of the ESG rating provider. 

As regards the Mix of Products and Services Offered, some ESG rating providers rate companies 
and simultaneously offer paid advisory/consulting services to the same companies to improve ratings, 
either directly or via third party recommendations. This is perceived by companies and investors as 
a potential significant conflict of interest98 and may create a bias towards those companies willing to 

93 See the Study, p. 98. 
94 Subject to Regulation (EC) No 1060/2009 on credit rating agencies, OJ L 302 17.11.2009, p. 1. 
95 Subject to Regulation (EU) 2016/1011, OJ L 171, 29.6.2016, p. 1-65. 
96 Subject to Directive 2011/61/EU, OH L 174, 1.7.2011, p. 1-73. 
97 Tang, Yan, and Yao, 2022, op. cit. 
98 Example of ESG rating provider offering consulting services, ISS Corporate Solutions, “Sustainability Solutions,”. 

20 

 
                                                 
pay for such advisory services (or perverse incentives to first give a worse rating and significantly 
improve it after advisory services are utilised). Some ESG rating providers also charge companies 
that are subject of ratings (but not users thereto) to see their own reports, again creating a perceived 
bias towards those companies with resources to financially engage. 

On  the  Separation  of  Commercial  and  Analytical  Teams,  the  Study  concluded  that  providers 
selling  multiple  products  –  such  as  ESG  ratings,  ESG  data,  ESG  benchmarks  -  may  require  an 
elevated and appropriate separation between departments to avoid potential conflicts of interest. Most 
ESG  rating  providers  have  introduced  some  rules  on  the  separation  of  their  departments99,  but 
information and details on how such separation is effective, benefits from a ‘Chinese wall’, a business 
term  used  to  describe  a  virtual  barrier  erected  to  block  the  exchange  of  information  between 
departments in a company100 is very limited but also unclear101. Furthermore, a conflict of interest 
may arise if product and service provision teams have the potential to be influenced by teams from 
the commercial part of the business. 

Finally, regarding Methodology Governance, the Study highlighted that a conflict of interest may 
arise if an ESG rating provider does not have processes in place to ensure that the methodology is 
appropriately applied and analysts are not influenced by outside parties. 

Another aspect which also seems to lack transparency and clarity concerns fee schedules, rates and 
terms  from  ESG  rating  providers.  In  its  overview  of  findings  from  its  Call  for  Evidence,  ESMA 
concluded that “transparency issues seem to exist regarding the minimum term and fee rates of ESG 
data and rating contracts, leading to different  users contracting for the same ESG products  under 
differing  contractual  terms”102.  Little  information  is  available  publicly,  on  the  websites  of 
sustainability assessment providers (that include rating providers) about fee schedules and how much 
they charge for various products. No information is also available specifically on ESG rating fees. 
Some providers indicate some information but only with very large ranges for their fees related to 
various  products  and  services  they  provide103  without  specifying  further  reasons/criteria  for  the 
differences and how users/issuers will be charged for various products and services. Some providers 
also indicate that fees are negotiable and that discounts may be available where clients subscribe to 
multiple products or additional locations104. 

Some other concerns have been raised with regards to the handling of confidential information by 
ESG rating providers in the absence of any clarity on how they treat such information105. 

Robust governance is needed in the operations of ESG rating providers to give certainty and clarity 
for users over the way ESG rating providers are structured and provide their services. 

2.3 HOW LIKELY IS THE PROBLEM TO PERSIST? 

There is little evidence to suggest that the current trends and functioning of the ESG rating market 
will change. 

99 For example, MSCI, How MSCI manages conflicts of interest.   
100 See definition of Chinese Wall on Investopedia. 
101 Sustainalytics, managing potential institutional conflicts of interest policy abstract, 6 pages. 
102 ESMA Call for Evidence, p. 17, Section 25. 
103  For  example,  MSCI  indicates  that  the  ‘fees  for  each  of  MSCI  ESG  Research’s  services  range  from  $5,000  to 
$2,000,000 per year, depending on the specific services selected as well as the business units, location or use case.’. 
104 See information from MSCI here. 
105 See IOSCO Environmental, Social and Governance (ESG) Ratings and Data Products Providers Final Report, p. 37. 

21 

 
                                                 
Due to the expected strengthening and growth of the ESG rating market, driven by booming interest 
in sustainable investment as well as expectations on asset managers, banks and insurers to disclose 
ESG-related information on their portfolios, the vulnerabilities that exist within the current market-
based  system  are  likely  to  grow.  This  may  amplify  the  risk  of  a  potential  high-impact  or  high-
visibility occurrence of greenwashing. This already creates reputational problems and risks for the 
ESG rating market and leads to inappropriate investment decisions or allocations to e.g. companies 
that do not contribute to greening the environment / tackling climate change, thereby reducing the 
trust of investors on which this market relies. This may also eventually lead to increasing costs for 
issuers as well as for society generally. 

Section 5.1 (describing the baseline scenario or the so-called “no policy change” scenario) provides 
a more detailed description of the expected evolution in the case of no new policy initiative by the 
European Union.  

3.  WHY SHOULD THE EU ACT? 

3.1  LEGAL BASIS  

In this Impact Assessment, the combination of three Articles of the TFEU were considered as legal 
bases. Firstly, Article 50(g) TFEU on coordinating safeguards required of EU companies by Member 
States with a view to making such safeguards equivalent throughout the Union, and/or Article 53(1) 
TFEU on the taking-up and pursuing of activities by self-employed persons. Then and in addition, 
Article 114 TFEU, lex generalis, that applies as well with the objective of establishing or ensuring 
the functioning of the internal market. 

3.2  SUBSIDIARITY: NECESSITY OF EU ACTION 

The objective of this initiative, to improve clarity over the characteristics of ESG ratings but also 
operations  of  ESG  rating  providers,  cannot  be  sufficiently  achieved  by  Member  States  acting 
independently and action at EU level is necessary for the proper functioning of EU capital markets. 

There  is  currently  no  EU  regulatory  framework  for  ESG  rating  providers.  Member  States  do  not 
regulate  the  activities  of  ESG  rating  providers  or  the  conditions  under  which  they  deliver  their 
products or services. Each ESG rating provider follows its own rules and clarity over what they do 
and how they do it is missing. It can be said that the ESG rating providers market is a black box. 

The  market  of  ESG  rating  providers  is  global,  and  the  biggest  providers  operate  in  a  number  of 
Member States. They may have a headquarter in one Member State and subsidiaries in others or in 
many cases have their headquaters outside the EU and their subsidiaries within the EU. ESG rating 
providers also provide cross-border services. 

Although Member States could individually take action to strengthen the reliability and comparability 
of ESG ratings, such measures are likely to be significantly different between Member States, which 
may create diverging levels of transparency, barriers for market participants and challenges for those 
operating across borders (as this is particularly the case for this market, with users in a number of 
Member States), in addition to limiting comparability between ratings. For example, an ESG rating 
provider  would  potentially  have  to  register  with  and  meet  different  requirements  of  national 
authorities, creating extra costs. Moreover, different and potentially even inconsistent requirements 
could result in divergent operations of the same ESG rating provider across the EU; this could even 
lead to divergence of ratings even within the same provider. This would cause issues and confusion 
for  rated  companies  and  rating  users  alike  and  would  ultimately  lead  to  an  uneven  protection  of 
investors in different Member States. Some users could also be tempted to choose an ESG rating 

22 

 
provider located in a given Member State because of the absence of or lower criteria set, creating a 
fair competition issue. 

On the other hand, with the complete absence of rules on the operations of ESG rating providers, the 
situation as it stands today and issues relating to transparency would continue and could even worsen, 
as further explained in Section 5.1. 

3.3  SUBSIDIARITY: ADDED VALUE OF EU ACTION 

As  attention  to  sustainable  investing  and  ESG  ratings  grows  in  jurisdictions  around  the  world,  it 
becomes essential for the EU to engage with its partners on the basis of a coherent and comprehensive 
European  approach.  The  initiative  would  not  replace  national  legislation  as  there  is  currently  no 
legislation in place in any Member State regulating the functioning of ESG rating providers. 

The  general  objective  is  –  by  improving  clarity  over  the  characteristics  of  ESG  ratings  but  also 
operations of ESG rating providers – to better exploit the potential of the European Single Market to 
contribute to the transition towards a fully sustainable and inclusive economic and financial system 
in accordance with the European Green Deal and UN Sustainable Development Goals. 

The functioning of the internal market would be improved with further clarity over operations from 
actors that are increasingly important for channelling finance. 

4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? 

4.1  GENERAL OBJECTIVES 

The general objective of this initiative is to better exploit the potential of the European Single Market 
and to contribute to the transition towards a fully sustainable and inclusive economic and financial 
system in accordance with the European Green Deal and UN Sustainable Development Goals. This 
can  be  achieved  by  improving  the  ability  of  investors  to  make  informed  decisions  regarding  the 
sustainability  of  investments  as  well  as  by  helping  companies  to  understand  their  sustainability 
performance.  Since ESG ratings and underlying data are used for investment decisions and allocation 
of capital, the general objective of the initiative is to ensure that ESG ratings enable investors and 
rated companies to take informed decisions with regard to managing ESG risks and the impacts of 
their  investments  or  operations.  This  can  be  achieved  by  enhancing  the  reliability  and  quality  of 
information about ESG ratings. 

At the same time, it is crucial to foster trust and confidence in the operations of ESG rating providers 
by ensuring that the market operates properly and ESG rating providers prevent and manage conflicts 
of  interest.  Reliable  and  quality  ESG  ratings  will  also  contribute  to  the  integrity  of  the  financial 
ecosystem and investor protection. 

4.2 

 SPECIFIC OBJECTIVES 

There are two specific objectives, which relate to the two problem drivers:  

 

Increased clarity on ESG ratings characteristics (what they mean and what objectives they 
pursue), the methodologies and the data sources or estimates used to obtain the ESG ratings 

  Provide increased clarity on the operations of ESG rating providers as well as ensure the 
prevention and mitigation of risks of conflicts of interest at ESG rating providers’ level 

23 

 
5.  WHAT ARE THE AVAILABLE POLICY OPTIONS? 

5.1  WHAT IS THE BASELINE FROM WHICH OPTIONS ARE ASSESSED? 

The market of ESG ratings has expanded rapidly, following the growth in demand for ESG 
ratings, in particular from investors. However, the market is not functioning well. 

The baseline scenario for the purposes of this impact assessment is one of ‘no policy change’ in the 
market of ESG ratings. The present trend of increased usage of ESG ratings means that the problems 
will grow accordingly in the next 5-10 years. The new requirements imposed on financial institutions 
and  market  participants  with  the  sustainable  finance  legislation  (such  as  the  CSRD,  SFDR, 
Taxonomy Regulation) will continue to put pressure on the market and lead to an increased demand 
for ESG ratings but also other sustainability assessment tools.  

In the survey conducted for the Study and the IRRI Survey 2019106, the vast majority (75%) of asset 
managers anticipated an increased demand for both in-house and external ESG ratingsRespondents 
consider the decisive determinants of this growth to be demand from investors for ratings for their 
investment decisions, further standardisation of information disclosed by companies and other market 
participants, and growth in demand from companies for ratings including on future strategies. The 
majority of respondents expect to increase their usage of ESG ratings.   

Not  only  the  use  of  ESG  ratings  is  expected  to  grow  but  also  the  role  they  play  in  investment 
strategies. Changes of investment trends are already visible.  In 2020, ESG integration became the 
dominant  approach,  surpassing  exclusionary  screening-based  strategies  and  became  the  largest 
sustainable  investment  strategy  globally  according  to  Global  Sustainable  Investment  Review 
(GSIR)107    with  a  combined  USD  25.2  trillion  in  assets  under  management  employing  an  ESG 
integration approach, also being the most commonly reported strategy in most regions108  

While  coming  directly  from  the  market,  demand  for  ESG  data  and  ratings  is  also  reinforced  by 
sustainable  finance  legislation,  such  as  the  CSRD,  SFDR,  Taxonomy  Regulation  or  EU  Climate 
Benchmarks legislation, and initiatives under the revised Sustainable Finance Action Plan. 

Notably, the entry into force of the CSRD and the introduction of mandatory sustainability reporting 
standards  for  companies  should  impact  the  baseline  scenario  by  increasing  the  availability, 
standardisation,  quality  and  reliability  of  corporate  sustainability  data.  This  will  have  a  positive 
impact on the quality of ESG ratings, which relies on the quality of available data.  Unfortunately, 
the  impact  on  correlation  amongst  ratings  is  harder  to  predict.  According  to  a  research  paper 
published in 2021, “greater ESG disclosure actually leads to greater ESG rating disagreement” 109. 
Where ESG rating providers appear to disagree most is on the assessment of firms ‘outcome metrics’, 
which refer to  actual changes achieved (e.g., the percentage of women employed  by  a company), 
since evaluating outcomes is more subjective110. As such, it is possible that ESG ratings divergence 
may increase with the implementation of the CSRD. However, as the authors themselves note, this 
dynamic may be related to the early phase of ESG disclosures, when there is little consensus among 

106 IRRI Survey 2019.  
107 http://www.gsi-alliance.org/wp-content/uploads/2021/08/GSIR-20201.pdf 
108 CFA Certificate in ESG Investing curriculum Oct. 2021 version 
109Dane Christensen, George Serafeim, Anywhere Sikochi,  “Why is Corporate Virtue in the Eye of The Beholder? The 
Case of ESG Ratings”, Harvard Law School Forum on Corporate Governance, 2021. 
110 UNPRI - ESG rating disagreements: why is corporate virtue so subjective?. 

24 

 
                                                 
analysts on ESG performance metrics. Indeed, this dynamic of divergence may neutralise or reverse 
in the future. In any case, greater disclosure will reduce the issues around data collection. 

Continued uncertainty for users of ESG ratings. 

According to the Study, half of asset managers and half of benchmark administrators use corporate 
data and carry out their own assessments, whereas the other half rely on third party ESG ratings. This 
has been confirmed by the targeted consultation: only 17% of respondents stated that ESG ratings 
are a decisive input for their investment decisions; the majority use them either as a starting point for 
their internal analysis (32%) or as one of many sources of information (30%). This means that the 
improvement of the quality and availability of corporate reporting will have positive consequences 
for those users who carry out their assessments internally. However, users continue to face problems 
linked  to  third  party  ESG  ratings,  which  can  result  in  bad  investment  decisions  and  even 
greenwashing. Without any action, a continued lack of trust in ESG ratings can be expected.111.  

Continued risk of misalignment of investments and greenwashing112 

The risk of greewashing and misalignment of investments will continue to incease with the growth 
of  ESG  funds  and  of  the  usage  of  ESG  ratings.  As  long  as  ESG  ratings  and  their  bases  remain 
insufficiently  transparent,  investors  may  believe  that  a  company  they  invest  in  has  some  positive 
impact/consideration  of  the  environment,  while  in  reality  environmental/social  impact  is  not  the 
objective  of  the  rating  or  some  key  elements  have  not  been  factored  in  (e.g.  controversies).  For 
example, a rrecent article by Bloomberg - and their analysis of MSCI’s ESG rating for McDonald’s113 
- highlights potential risks and consequences associated with the lack of or sub-optimal transparency 
on ESG ratings that may lead to some form of greenwashing or socialwashing114. 

Given the increasingly important role the ESG ratings play in the ecosystem115, the lack of reliable 
and credible ESG assessments and possible greenwashing can lead to misalignment of investments 
with Green Deal objectives. Misalignment of investments may in turn undermine the stability of the 
financial system, if in the future corrective actions will be necessary.  

5.2  DESCRIPTION OF POLICY OPTIONS 

In  order  to  focus  the  impact  assessment  on  a  limited  number  of  key  variables  and  improve  its 
readability, this section presents different policy options for two main variables: 

 

increased clarity on operations of ESG rating providers as well as the prevention of risks 
of conflict of interest at ESG rating providers level, and  

111 See further information here. 
112 Recently, ESG ratings came under an increased scrutiny due to critical media reports (e.g. Greenwashing accusations 
against French care home provider Orpéa). 
113 Cam Simpson, Akshat Rathi, and Saijel Kishan, “The  ESG  Mirage”, Bloomberg, December 10, 2021. 
114 See footnote above. “BlackRock and other investment funds use ESG ratings to justify a “sustainable” label on stock 
and bond funds. MSCI ESG Benchmark is constructed on the basis of MSCI ESG ratings. MSCI ESG ratings assess only 
ESG-related risk and opportunities (finanical  materiality) and  measure companies  not against  universal standards but 
against their industry peers. This means that all invesments labeled sustainable on the basis of MSCI ESG ratings or any 
passive  funds  using  MSCI  ESG  Index  direct  the  flow  of  capital  into  companies  that  are  best  among  their  peers  in 
managing the ESG related risks and opprtunities to themselves, with no consideration of their impact on the environment 
or society.”. 
115 What Should Everyone Know about ESG Ratings? Kornelia Fabisika and Sophie-Dorothee Rotermund 

25 

 
                                                 
 

the need to improve clarity of ESG ratings characteristics (i.e. what they mean and what 
objectives they pursue, the methodologies and the data sources or estimates used for their 
development).  

These variables  are most important  in  terms  of  (i) addressing the identified problems  and  (ii) the 
principal determinants of costs. 

Scope  is  also  an  important  dimension  as  entities  fall  under  the  scope  of  the  initiative  need  to  be 
defined precisely. The purpose of the initiative is to cover all ESG rating providers that operate in the 
EU. Therefore, the term “operate in the EU” must be defined, as well as the term “ESG ratings”. The 
analysis of the scope is done in a separate Chapter 5.5. 

Policy  options  are  analysed  for  two  dimensions,  i.e.  entities  (ESG  rating  providers)  and  products 
(ESG ratings). 

1.  Regulatory treatment of ESG rating providers: 

o  Option 1 – Industry code of conduct 
o  Option 2 – Registration and light supervision  
o  Option 3 – Authorisation, principle-based organisational requirements, transparency 

requirements and risk-based supervision 

2.  The extent of transparency requirements on ESG ratings and their methodologies  

o  Option 1  - Minimum disclosure requirements for the public 
o  Option  2  –Minimum  transparency  disclosures  to  the  general  public  and  more 
comprehensive disclosures to clients of ESG rating providers and rated companies 

Overview how dimensions address the specific objectives: 

Dimensions 

Regulatory  treatment  of 
ESG rating providers 

Transparency 
ESG ratings 

on 

Specific 
objectives 

Increase  clarity  and  oversight 
over the operations of ESG rating 
providers 

X  

 Increase  clarity  of  ESG  ratings 
characteristics 

N/A 

N/A  

X 

5.2.1  REGULATORY TREATMENT OF ESG RATING PROVIDERS 

Option 1 – Industry code of conduct (voluntary) 

The Commission would encourage the development and adoption of a voluntary industry code of 
conduct regarding operations and disclosures by ESG rating providers. The code of conduct would 

26 

 
 
 
 
 
be  developed  directly  by  the  industry,  but  should  in  that  case  ideally  be  built  on  the  IOSCO 
recommendations116. 

The code of conduct would cover the following recommendations: 

  adopting and implementing policies and procedures designed to help ensure the issuance of 

high quality ESG ratings, including defined methodologies, 

  adopting and implementing policies and procedures designed to help ensure their decisions 

 

are independent, free from political or economic interference,  
identification, or appropriate management, mitigation and disclosure of potential conflicts of 
interest, 

  adopting  and  implementing  policies  and  procedures  concerning  public  disclosure  and 
transparency  on  the  scope  and  objective  of  providers’  rating  product(s),  as  well  as  their 
methodologies and processes, 

  adopting and implementing policies and procedures designed to address and protect all non-
public information received from or communicated to ESG rating providers by any entity. 

Providers could be asked to apply the code of conduct on the comply or explain basis. 

Option 2 – Registration and light supervision of ESG rating providers 

The option entails the establishment of a central registry of those ESG rating providers falling under 
the scope of this initiative. Under this option providers would be required to register at EU level as 
well  as  provide  basic  information  (such  as  entity  name,  domicile,  registration  number,  scope  of 
activities,  type  of  services  provided,  type  of  business  model,  policies  on  the  prevention  of  the 
conflicts of interests, policies on ensuring the quality of ESG ratings, etc.) and update the information 
as necessary.  

Given ESMA’s role and experience as a European supervisor, e.g., of credit rating agencies, it would 
be logical for ESMA to also manage the central registry for ESG rating providers. Only registered 
entities would be permitted to provide ESG ratings. A simplified sanctioning regime will be applied 
in  case  of  non-compliance  with  the  registration  requirements.  ESMA  would  be  given  the  task  of 
enforcement. 

Information to be provided for the registration purposes will be specified in Level 2 measures. This 
option doesn’t include on-going supervision of registered entities. 

Under this option, the information made available on the central registry would provide clarity to 
markets  on  the  operations  of  ESG  rating  providers.  However,  this  option  does  not  offer  greater 
transparency or clarity over characteristics/methodologies of ESG ratings. 

Option  3  –  Authorisation,  proportionate  organisational  requirements  and  risk-based 
supervision of ESG rating providers 

This option requires in-scope ESG rating providers to undergo an authorisation process in order to 
offer their services in the EU. Authorisation will be subject to meeting proportionate and principle-
based requirements. 

These requirements should encompass the following: 

116 IOSCO - Environmental, Social and Governance (ESG) Ratings and Data Products Providers. 

27 

 
                                                 
 

the provider’s rating/scoring processes and decisions are independent, free from political or 
economic interference, 

  providers have procedures for ensuring the issuance of high quality ESG ratings, including 
the use of transparent and defined methodologies and ensuring the quality of data used in the 
rating/scoring process, 
the provider’s rating/scoring business is properly separated from other businesses to avoid 
potential conflicts of interest and if ancillary services are provided, they do not influence the 
role of analysts while preparing an ESG rating, 

 

  providers  have  governance  and  internal  control  policies,  including  identification,  for 
appropriate management, mitigation and disclosure of potential conflicts of interest or undue 
influence; addressing the specificities of company pay model and user-pay model, 

  providers  have  policies  and  procedures  designed  to  address  and  protect  all  non-public 

information received from or communicated to them by any entity, 

  providers have policies on the disclosure of key information concerning their business model 

and their policies, 

  Providers have rules in place regarding record keeping, 
  Providers have rules  in  place  for receiving, investigating and retaining records concerning 

complaints made. 

Details  of  the  information  to  be  provided  for  the  purpose  of  authorisation  will  be  specified  in 
delegated acts, to be developed by ESMA. 

Given the cross-border nature of activities of ESG rating providers and the importance of ensuring a 
consistent EU supervisory approach, authorization and supervision will be carried out by ESMA. 

This option subjects in-scope ESG rating providers to ongoing (EU) supervision, based on a risk-
based and data driven approach and proportionate to the size of the entity. This approach has been 
undertaken by ESMA in relation to all directly supervised entities.117 

This option would also provide for a sanctioning regime and the application of supervisory measures 
by the supervisor (ESMA). This regime would be framed in the legislation, it would provide for fines, 
public notices in case of non-respect of the obligations. 

Authorization and supervision should not be too burdensome for new entrants and smaller providers 
such as to prevent them from entering or/ remaining in the market. 

To  mitigate  potential  concerns  about  loss  of  access  to  the  market  providers,  providers  would  be 
allowed to continue operating on the condition that they notify ESMA and become authorized within 
a pre-determined period of time, the transitional period118. The length of the transitional period will 
be adapted to the size of players, giving smaller players more time to complete the authorisation and 
in this way easing the burden for them. Similarly, a transitional period for new and small entrants to 
the market could be foreseen, requiring them to notify ESMA and then giving them a period of time 
to complete the authorisation process.  

117 ESMA has adopted a risk-based and data-driven approach when conducting supervision and prioritises its supervisory 
activities according to the level of risk identified and outcomes it targets.  A risk analysis is  used to identify areas of 
possible  non-compliance  and  to  assess  the  potential  significance  of  the  issue.  Risks  are  identified  by  collecting  and 
assessing information from different sources like periodic and ad hoc notifications submitted by the entities, registration 
application files, meetings/calls with entities, data analysis, on-site inspections/investigations etc. To identify key priority 
areas  for  supervision,  ESMA  considers  the  result  of  its  supervisory  risk  assessment,  and  key  market  trends  in  the 
respective industries and capital markets more broadly. 
118 The precise period of time is yet to be determined, but it would be designed to allow sufficient time, that could also 
take account of the size of market players.  

28 

 
                                                 
The mitigation measures for smaller providers are discussed in Annex 5 and include: (i) transition 
period (ii) adjustment of supervisory fees to the size of the provider (iii) risk-based supervision (iv) 
exemption for smaller and innovative providers from certain organisational requirements which may 
not be proportionate to the nature, scale and business model of the provider. 

5.2.2  LEVEL OF TRANSPARENCY REQUIREMENTS ON ESG RATINGS AND THEIR METHODOLOGIES  

Option 1  - Minimum transparency for the general public only 

This option requires all ESG rating providers to publicly disclose key information about ESG rating 
characteristics and methodologies, clearly indicating at least the following: 

  high  level  overview  of  the  rating  methodologies  used  (and  changes  thereto),  including 

whether analysis is backward-looking or forward-looking,  

  high  level  overview  of  data  processes  (data  sources,  including  if  they  are  public  or  non–
public,  and  if  they  are  sourced  from  CSRD  reports,  estimation  of  input  data  in  case  of 
unavailability, frequency of data updates), 
information on the ratings’ objective (e.g., whether it assesses risks or impacts (or both), is it 
a compliance assessment or supply chain assessment or other type of rating), 

 

  clearly marking whether the rating is assessing risk or impacts or some other dimension, 
  application of the materiality perspective, 
 

the rating’s scope – i.e., is it an aggregated rating (aggregating E and S and G factor), rating 
of individual factors or specific issues (e.g., transition risks), 
in  case  of  aggregated  ESG  rating,  weighting,  i.e.,  percentage  of  the  different  ESG  factors 
(e.g., 33% Environment, 33% Social, 33% Governance), and the explanation of the weighting 
method, 

 

  within the E, S or G factors, specification of the topics subject to the ESG rating/score, also 
looking at the topics from the CSRD (e.g., climate, biodiversity, pollution, water and marine 
resources, working conditions, ethics and corporate culture), 
information on whether the rating is expressed in absolute or relative values, 
reference  to  the  use  of  Artificial  Intelligence  (if  applicable)  in  the  data  collection  and/or 
rating/scoring process, 

 
 

  high level information on pricing methods. 

Option 2 - Minimum transparency disclosures for the general public and more comprehensive 
disclosures to clients of ESG rating providers and rated companies 

This  option  would  require  all  providers  to  disclose  more  granular  information  about  ESG  rating 
characteristics and methodologies, in addition to public disclosures covered in Option 1. This option 
would require providers to disclose the following additional information to their subscribers and rated 
companies:  

  a more granular overview of the rating methodologies used (and changes thereto), including 
whether  the  analysis  is  backward-looking  or  forward-looking,  which  metrics  have  been 
selected  as  relevant,  the  main  KPIs  and  weighting  method,  any  potential  shortcomings  of 
methodologies, policies for the revision of methodologies, last date of the revision; 

  a more granular overview of data processes, including  

o  more detailed explanation of data sources used – e.g., public or otherwise, mentioning 

whether derived from CRSD reports,    

o  where data is unavailable, indicate the use of and explain any estimation methodology, 
o 
the policies for updating data and revising historical data, date of last updates of data, 
o  data quality controls, 

29 

 
o  engagement with rated companies. 

 

If applicable, an explanation of any AI methodology used in the data collection and/or rating 
process. 

Precise disclosure requirements would be developed by ESMA as a Level 2 measure. 

For both Option 1 and Option 2, It is not the objective of this initiative to require ESG rating providers 
to disclose intellectual capital, intellectual property, know-how or the results of innovation that would 
qualify as trade secrets as defined in the Trade Secrets Directive119. 

5.3  SCOPE, DEFINITION OF ESG RATINGS AND TYPES OF PROVIDERS  

5.3.1  ENTITIES TO BE COVERED/GEOGRAPHICAL COVERAGE 

Figure 1: Share of respondents by nature of establishment according to the mapping exercise carried 
out by ESMA 

The  market  of  specialised  ESG  rating  providers  is  global,  with  the  biggest  providers  having 
headquarters  outside  of  the  EU  (Bloomberg  –  USA,  MSCI  USA,  Refinitiv-  UK,  RepRisk  – 
Switzerland, S&P – USA, Morningstar – USA, Moody’s – USA). 

According to the mapping exercise carried out by ESMA in the context of the Call for Evidence120 
(see  Figure  1  above),  there  are  59  entities  providing  ESG  ratings  in  the  EU,  either  to  European 
investors or companies. Half of the ESG rating providers that responded to ESMA Call for Evidence 
indicated that they are an independent legal entity without a group structure. The other half are either 
parent companies or subsidiaries of a group structure. Many providers have more than one entity in 
the EU, and many have headquarters outside the EU. Out of 59 entities, 14 have no presence at all in 
the EU, yet they provide services to European investors and/or companies. 

It is crucial that the initiative covers all providers operating in the EU and not only those having a 
legal entity established in the EU. In addition, even if the group has a legal entity in the EU, the EU 
may not be the location where the development of ESG ratings takes place. The market is global and 
so are the operations of providers that may have data specialists in one location, analysts and sales 
teams in others.  

119  Directive  (EU)  2016/943  of  the  European  Parliament  and  of  the  Council  of  8  June  2016  on  the  protection  of 
undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure, 
OJ L 157, 15.6.2016, p. 1–18. 
120 ESMA Call for Evidence on ESG Ratings. 

30 

 
 
                                                 
Firstly, this initiative should create a level-playing field for all ESG rating providers operating in the 
EU.  In order to achieve that the initiative cannot leave out any providers, no matter what size or 
location, as long as they operate in the EU.  

Secondly, the term “operate in the EU” needs to be clearly defined. For the purpose of this initiative, 
the  term  “operating  in  the  EU”  is  defined  as  providing  services  to  European  regulated  financial 
institutions and other regulated financial market participants as well as to European companies in 
scope of the CSRD.  There are the following reasons for such a definition: 

  Two thirds of ESG rating providers offer their product to professional investors, i.e. financial 
institutions  and  financial  market  participants,  mainly  asset  managers  and  benchmark 
administrators. 

  One third of providers offer their products to companies  (meaning that it is a company which 
requests  and  pays  for  the  ESG  rating),  Therefore,  in  order  to  capture  that  group,  the  term 
“operating in the EU” needs to include ESG ratings requested by European companies, both 
listed  and  large  non-listed  ones  (as  defined  by  the  Corporate  Sustanability  Reporting 
Directive).  

From an economic point of view, it is also crucial to bring within scope all ESG ratings providers 
operating in the EU, including also small providers.  

In line with the responses to the public consultation, leaving out small providers would be contrary 
to the objective of this initiative i.e. ensuring that ESG ratings enable investors and rated companies 
to take informed decisions with regard to managing ESG risks and impacts of their investments or 
operations). Exclusion of smaller providers could negativelly impact them, as they could be regarded 
as less trustworthy  and their ratings  as  of less quality  and reliability. Therefore,  there is  no other 
option that could be addressing the objectives of this initiative, apart from including under the scope 
of the initiative all providers that operate in the EU, no matter what is their location or size. At the 
same time, this initiatve foresees mitigating measures for smaller providers. 

5.3.2  ALTERNATIVE COVERAGE OF GEOGRAHICAL SCOPE 

We  have  analysed  alternative  options  on  the  geographical  scope,  namely  the  differentiation  of 
requirements for the entities located in the EU as opposed to those located outside the EU. We have 
concluded that the option limiting the geographical scope to the territory of the EU would lead not 
only to an unlevel playing field, but also would not reach the objectives of the initiative, and as a 
result doesn’t constitute a viable option. 

As explained in this Impact Assessment, European providers are mainly smaller in size and thus their 
market share is rather limited. If non-EU providers, which are larger and have bigger market share, 
could  continue  providing  their  services  in  the  EU  without  being  subject  to  the  transparency 
requirments  or  organisational  requirments,  problems  with  the  lack  of  transparency  and  problems 
relate to conflict of interest would continue to influence ESG ratings used by European investors. 
Therefore the objectives of this initiative would not be reached. 

Summing up, there is no other viable option than the one presented in the Impact Assessment,  to 
create a level playing field for all ESG rating providers operating in the EU. In order to achieve that, 
the initiative cannot leave out any providers, no matter where they are located, as long as they provide 
ESG  ratings  to  European  regulated  financial  institutions  and  other  regulated  financial  market 
participants as well as to European non-financial companies.   

31 

 
5.3.3  TYPES OF PROVIDERS 

There are two major groups of ESG ratings providers: specialised entities providing ESG ratings to 
professional  investors  and  companies  (see  description  in  Chapter  X  on  Problem  Definition  and  
Annex 6), as well as financial institutions developing ESG ratings for their own purposes, principally 
for internal analysis or marketing.  

It is important to make a distinction between ESG ratings that are made available for commercial 
purposes, and those ESG ratings that are developed in-house for internal use. Financial institutions 
use  their  own  proprietary  models  and  don’t  provide  ESG  ratings  commercially  to  other  entities. 
Therefore, the key problem that this initiative aims to address (i.e. information asymmetry between 
providers  and  users  of  ESG  ratings)  does  not  materialize  in  their  case.  Furthermore,  financial 
institutions are regulated entities and are already subject to sectoral legislation. 

The  Commission,  following  outreach  activities,  academic  literature  and  the  Study,  has  identified 
problems  mainly  in  relation  to  the  operation  of  specialised  entities  offering  ESG  ratings,  while 
evidence of any problems in relation to the transparency and use of in-house ESG ratings developed 
by asset managers or benchmark administrators is rather anecdotal. In addition, asset managers are 
already  subject  to  authorisation,  supervision  and  disclosure  requirements  under  EU  sectoral 
legislation,  i.e.,  Directive  2011/61/EU  (Alternative  Investment  Fund  Directive  -  AIFMD)121, 
Directive  2014/91/EU  (Undertakings  for  Collective  Investment  in  Transferable  Securities 
(UCITS))122  and  Regulation  (EU)  2019/2088  on  sustainability‐related  disclosures  in  the  financial 
services sector (SFDR)123. Given the absence of strong evidence of shortcomings in this market and 
extensive existing legislation on the operations of investors, the development of ESG ratings by asset 
managers, where the latter are not marketed/sold and where they are for in-house use, is out of the 
scope of this Impact Assessment. At the same time, it is also important not to disincentivise asset 
managers from developing their own ESG ratings. 

Summing up on scope, this initiative will target the specialised entities providing ESG ratings to the 
public  or  to  subscribers  and  will  not  cover  financial  institutions  or  other  market  participants 
developing ESG ratings for their own purposes. The development of ESG ratings for own purposes 
and own use is out of the scope of this analysis.  

5.3.4  DEFINING ESG RATINGS  

As discussed in Chapter 2.2 on Problem Drivers, there is a lack of clarity around what ESG ratings 
are,  what  they  mean  and  what  they  capture.  There  is  no  universally  accepted  definition  of  ESG 
ratings;  in  addition,  market  participants  use  different  terms  –  such  as  ESG  “rating”,  “score”  or 
“valuation”, or they refer to ESG “data” as a term encompassing data and ratings/scores/valuations. 

As described in Chapter 2.2, there are two main distinctive types of products - opinions formed by 
analysts (usually referred to as ratings) and scores, as well as products mixing those features. Scores 
are  typically  based  only  on  a  pre-established  statistical  system  or  model,  without  any  additional 
substantial  rating-specific  analytical  input  from  a  rating  analyst.  Most  ESG  ratings  constitute  a 
mixture of the two, with more or less involvement of analysts. There are, however, also pure scores 
as well as pure ratings provided in the form of an opinion with a role for the lead analyst. 

121 OJ L 174, 1.7.2011, p. 1–73. 
122 OJ L 257, 28.8.2014, p. 186–213. 
123 OJ L 317, 9.12.2019, p. 1–16. 

32 

 
                                                 
The first attempt at defining ESG ratings has been undertaken by IOSCO (please see Chapter 1.1), 
widely agreed between practitioners and supervisors. It therefore forms the basis of the definition of 
ESG ratings for this initiative. Furthermore, this initiative will define the term ‘ESG ratings’, both 
for legal purposes and in order to define the scope of the initiative.  

it 

that 

is  crucial 

the  specificities  and 
As  explained  above, 
diversity/complexity of ESG ratings: ESG ratings can differ in their processes (involvement of an 
analyst  or  Artificial  Intelligence /  algorithmic driven or combination of both), in  their  scope (e.g. 
looking into the full ESG spectrum or only a subset or individual factors) and in what they measure 
(risks or impacts, compliance or double materiality).The introduction of a definition of ESG ratings 
is necessary to define the scope of legislation and application of its requirements.  

the  definition  recognises 

At the same time, the purpose of this initiative is not to create a new label or a new product, but to 
ensure that existing products having similar features and performing similar functions fall under the 
scope of this initiative. 

5.4  OPTIONS DISCARDED AT AN EARLY STAGE  

The following options were considered but discarded at an early stage: 

5.4.1  REGISTRATION AND SUPERVISION AT NATIONAL LEVEL, 

The  market  of  ESG  rating  providers  is  global  therefore  any  national  system  would  be 
inappropriate and inefficient due to the fact that some providers have subsidiaries in more than 
one Member State, or even outside the EU, as well as provide services cross border. 

  Harmonising methodologies of ESG rating providers, 

There  are  several  arguments  against  the  harmonisation  of  methodologies.  Both  providers  and 
users are against the harmonisation of methodologies, as they welcome a variety of approaches. 
Next, ESG ratings pursue different objectives and cover different areas so their methodologies 
cannot  be  harmonised.  It  is  also  crucial  that  ESG  rating  providers  have  full  control  of  the 
methodologies they use and are independent in their choice. Lastly, defining the objectives and 
methodologies would affect innovation in this market and new ways of measuring ESG risks and 
impacts 

5.4.2  SETTING MINIMUM REQUIREMENTS ON THE CONTENT OF ESG RATINGS,  

As explained above, users welcome the diversity of asessments and do not call for regulating the 
content of ESG ratings. In addition, the ESG ratings pursue a variety of objectives and respond 
to demands from the professional investors. The existing classification systems for sustainability 
factors has been developed for corporates and not for the use by ESG rating providers. In addition, 
such an option would affect the inovation in this market. 

5.4.3  DETAILED TEMPLATES FOR DISCLOSURE REQUIREMENTS. 

Given the variety of objectives that ESG ratings pursue and methodologies used, a number of 
templates would need to be developed, undermining the objective of this option. The introduction 
of  standardised  templates  for  disclosures  might  have  some  negative  effects  on  innovation.  In 
addition, the requirement for the use of templates would create additional costs and burdens for 
smaller  providers  and  new  entrants.  ESG  rating  providers  would  need  to  implement  new 
procedures, and potentially renew or adapt their existing IT and reporting infrastructure. 

33 

 
Annex 9 describes each of these options in detail and the reasons for discarding them at an early 
stage. 

5.5  CRAS – ESG FACTORS IN CREDIT RATINGS 

As explained in Introduction, Credit ratings are out of scope of this Impact Assessment, but given 
the interest of stakeholders in the developments in the area of credit ratings, Annex 8 summarises the 
evidence and analysis carried out by the Commission services and ESMA.  

The main options analysed in Annex 8 are related to two problems: 

  Varied degree of rigorousness of the incorporation of ESG factors in the assessment of 
creditworthiness. Furthermore, there is heterogeneity in the identification and definition of 
ESG factors across CRA methodologies. 

  Insufficient  disclosure  in  relation  to  ESG  factors  that  have  influenced  changes  to  credit 
ratings. ESMA’s assessment suggests that although there has been an increase in the overall 
level of ESG disclosures in CRAs’ press releases since the introduction of the Guidelines on 
Disclosure  Requirements  applicable  to  credit  ratings  in  2019,  there  is  room  for  further 
improvement. 

5.5.1  POSSIBLE POLICY OPTIONS: 

A.  Specify in the CRA legal framework that in the case of the incorporation of ESG factors in 
the creditworthiness assessment, CRAs must do this in a systemic way and develop relevant 
methodologies:  

  Option 1 – via the targeted amendment of the CRA Regulation124 and subsequent 

amedments of the delegated act on methodologies125  

  Option 2 – via the amendment of the delegated act on methodologies126 

B.  Require that disclosures made by CRAs include a clear explanation as to whether and how 

ESG factors were considered within the CRA’s methodologies: 

  Option 1 – via the amendments of Annex I to CRA Regulation and subsequent 

amendments of ESMA Guidelines, 

  Option 2 – via the amendment of ESMA Guidelines. 

5.5.2  ANALYSIS: 

1)  The main area that can be further improved relates to the rigorousness of the inclusion of ESG 
factors in CRA’s methodologies. The general principles regarding methodologies set up by the 

124  Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating 
agencies 
125  Commission  Delegated  Regulation  (EU)  No  447/2012  of  21  March  2012  supplementing  Regulation  (EC)  No 
1060/2009 of the European Parliament and of the Council on credit rating agencies by laying down regulatory technical 
standards for the assessment of compliance of credit rating methodologies 
126 Idem 

34 

 
 
                                                 
Credit Rating Agencies Regulation already apply to the incorporation of ESG factors in credit 
ratings, whereas precise details concerning the conditions which methodologies should meet are 
specified in the deledated act on the methodologies for CRAs127. Our assessment is that changes 
to the CRA Regulation would need to be accompanied by changes to the delegated act. It is also 
possible  to  amend  the  delegated  act  without  amending  the  Regulation  itself.  Given  time  and 
resources needed to amend the Regulation and then the delegated, in our assessment it is more 
effective and efficient to amend the delegated act directly. 

2)  As  regards  the  disclosure  requirements,  the  Credit  Rating  Agencies  Regulation  includes  a 
number of requirements in that respect128. The regulation requires that CRAs disclose information 
to the public on their methodologies, models and key rating assumptions which they use in their 
credit  rating  activities.  With  a  view  to  ensuring  transparency,  disclosure  of  any  material 
modification  to  the  methodologies  and  practices,  procedures  and  processes  of  credit  rating 
agencies need be made prior to their coming into effect, unless extreme market conditions require 
an immediate change in the credit rating. Specific disclosure requirements are provided for in the 
Annex I to the CRAR Regulation. They have been further detailed in ESMA Guidelines. The 
CRA Regulation provides the Commission with the mandate to update the Annex I in view of the 
market developments. 

5.5.3  CONCLUSIONS 

Changes  to  Annex  I  and  ESMA  Guidelines  will  be  sufficiently  effective  to  address  remaining 
shortcomings  in  relation  to  disclosures  and  changes  to  the  delegated  act  on  methodologies    –  in 
relation to the incorporation of ESG factors in CRAs methodologies (for more explanation see Annex 
8).   

6.  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS AND HOW DO THEY COMPARE? 

The first part of this section analyses the impacts of the policy options on the regulatory treatment of 
ESG rating providers. The second part of this section analyses the impacts of the policy options on 
the transparency requirements for ESG ratings. 

6.1  OPTIONS ON REGULATORY TREATMENT OF ESG RATING PROVIDERS 

6.1.1  IMPACTS OF THE POLICY OPTIONS  

Option 1: Industry-led Code of Conduct for operations of ESG rating providers 

Under this option, the Commission would encourage the development and adoption by the industry 
of a voluntary code of conduct regarding operations and disclosures by ESG rating providers taking 
into account IOSCO Recommendations129. 

Expected  benefits:  An  industry-led  code  of  conduct  would  be  expected  to  partially  address  each 
objective:  clarity  on  ESG  ratings,  and  clarity  on  providers’  operations  and  prevention  of  risks  of 
conflicts  of  interest.  The  extent  to  which  each  objective  is  addressed  would  depend  on  both  the 
comprehensiveness of the code of conduct, and the extent to which providers adopt it. Ultimately, 
greater clarity on ESG ratings and on providers’ operations would benefit the  customers of code-
adherent  providers.  They  would  face  lower  costs  for  understanding  the  products  and  make  more 

127 Idem 
128 Section D of Annex I or CRA Regulation  – Rules on on the presentation of credit ratings and rating outlooks 
129 Environmental, Social and Governance (ESG) Ratings and Data Products Providers - Final Report. 

35 

 
                                                 
informed  choices.  In  addition,  this  approach  might  allow  greater  flexibility  to  adapt  to  changing 
markets than regulatory options. 

Potential drawbacks: This option would only partially address either objective, since there would be 
no incentive for the Code of Conduct to be as rigorous as required; Existing market pressures would 
determine the rigor and comprehensiveness of the Code, and those pressures have proven insufficient 
to address the problem. Moreover, the adoption of the Code of Conduct would be voluntary. Some 
providers might choose not to adopt it, or multiple industry Codes might arise. Both of these cases 
would undermine an increase in clarity across the market for users or rated entities. 

Who is impacted and how: 

  Users of ESG ratings: Users of providers who adopt the Code of Conduct may have lower 
due  diligence  costs  when  selecting  providers.  Reliable  and  transparent  ESG  ratings  can 
contribute  to  reducing  information  asymmetry  between  companies  and  investors  but  also 
avoid  important  costs  for  users  when  they  have  to  analyse  a  large  number  of  companies 
directly  in  order  to  get  an  accurate  understanding  of  the  ratings130.  The  magnitude  of  this 
benefit  is  not  possible  to  quantify  given  that  each  user  may  have  different  expectations, 
resources, and costs of due diligence, but it would be rather limited.  Users would also benefit 
from  increased  transparency  from  at  least  those  providers  adopting  the  Code  of  Conduct, 
enabling  more  informed  choices.  Overall,  limited  potential  benefits  to  users  would  be 
expected relative to the baseline. 

  Rated entities: As with users, entities rated by, or wishing to be rated by, providers adopting 
the  Code  of  Conduct  would  benefit  from  lower  costs  of  due  diligence  when  selecting 
providers. The magnitude of this benefit is not possible to quantify given that each rated entity 
has different expectations, resources and costs of due diligence. However, in case of a more 
rigorous Code of Conduct the benefit would be greater overall  as it would likely meet the 
needs  of  more  rated  entities.  Overall,  limited  potential  benefits  to  rated  entities  would  be 
expected relative to the baseline. 

  ESG  rating  providers:  ESG  rating  providers  would  be  free  to  choose  whether  or  not  to 
participate  in  the  development  of  an  Industry  Code  of  Conduct,  and  whether  or  not  to 
implement  it.  Therefore,  any  costs  would  be  voluntary.  This  option  would  be  expected  to 
result in minimal costs to ESG rating providers, arising from resources they may voluntarily 
dedicate to the industry development of a Code of Conduct, and from the implementation of 
the  resulting  standards  if  they  adopt  them.  However,  given  that  an  industry-led  Code  of 
Conduct would by nature be expected to be less stringent than regulatory requirements, and 
compliance would not necessarily be externally verified, these costs would be lower than for 
any  of  the  other  options  for  this  dimension.  This  option  could  also  result  in  some  limited 
benefits to providers stemming from the industry collaboration and sharing of best practices. 
Overall, a mixed effect of limited costs and indirect benefits to providers would be expected 
relative to the baseline. 

  EU and national  authorities: There would be  minimal  costs to  EU authorities stemming 
from engagement with the industry regarding the development of the Code of Conduct. There 
would be no resources needed for supervision. At the same time, public authorities would not 
receive information for monitoring developments in the sector.  

130 Van Duuren, Plantinga, & Scholtens, 2016. 

36 

 
                                                 
Stakeholder views: A small proportion of the responding ESG rating users and rated companies (7% 
and 11%, respectively) expressed support for this approach, 30% of ESG rating providers supported 
this measure, citing the advantage of limited market intervention. However, a larger proportion did 
not consider such an approach to be sufficient to address the lack of clarity on ESG ratings and lack 
of clarity and operational oversight. 

6.1.2  OPTION 2: REGISTRATION AND LIGHT SUPERVISION 

This option would mean the establishment by ESMA of a central registry of ESG rating providers. 
Under this option providers would be required to register at  EU level  as  well as to  provide basic 
information  (entity  name,  domicile,  registration  number,  scope  of  activities,  type  of  services 
provided,  type  of  business  model,  policies  on  the  prevention  of  conflicts  of  interest,  policies  on 
ensuring the quality of ESG ratings etc.) and changes thereto. A simplified sanctioning regime would 
be applied by ESMA in case of non-compliance with the registration requirements. 

Expected  benefits:  Enforced  registration  of  ESG  rating  providers  would  be  expected  to  partially 
address the objective of increased clarity on their operations. Providers would be required to provide 
basic information.  Ultimately,  greater clarity on  providers’ operations would  allow users to make 
more  informed  choices  of  provider  and  provide  some  level  of  reassurance  that  operations  are 
conducted appropriately.  

Potential  drawbacks:  This  option  would  not  fully  address  the  objective  of  increased  clarity  on 
operations and the prevention of risks of conflicts of interest at ESG rating providers level since there 
would  be  no  oversight  on  the  operations  after  initial  registration.  Thus,  aside  from  requiring 
information on quality assurance and conflict of interest management policies from providers, there 
would be no assessment of the sufficiency of such policies, nor of their  continued adequacy over 
time. Moreover, there would be some cost to the supervisor when setting up the registration procedure 
and sanctioning regime, which would be passed onto providers as fees. There would also be some 
costs to providers when providing the necessary documentation for the registration process.  

Who is impacted and how: 

  Users of ESG ratings: Users would be expected to benefit from lower costs of due diligence 
when selecting providers with the operations and conflict of interest management that they 
deem  appropriate.  Reliable  and  transparent  ESG  ratings  can  contribute  to  reducing 
information asymmetry between companies and investors but also avoid important costs of 
analysing  a  large  number  of  companies  directly131.  The  magnitude  of  this  benefit  is  not 
possible to quantify given that each user may have different expectations, different resources, 
and thus different costs of due diligence. Prospective users would also benefit from greater 
clarity as it would help them make more informed choices of provider. However, users would 
have limited assurance that providers’ operations are indeed sound and free of conflicts of 
interest, since there would be no ongoing oversight. Overall, limited potential benefits to users 
would be expected relative to the baseline. 

  Rated entities: Similarly to users, rated entities would experience many of the same impacts 
as users of ESG ratings, as described above. However, as is the case with users, rated entities 
would have limited assurance that providers’ operations are free of conflicts of interest, since 
there  would  be  no  ongoing  oversight  or  assessment  of  the  sufficiency  of  providers’ 

131 Van Duuren, Plantinga, & Scholtens, 2016. 

37 

 
 
                                                 
governance. Their investors would also have only limited assurance that the ratings are free 
from  conflicts  of  interest.  Overall,  limited  potential  benefits  to  rated  entities  would  be 
expected relative to the baseline. 

  ESG rating providers: This option would be expected to result in negligible or low one-off 
compliance  costs  to  ESG  rating  providers,  stemming  from  the  registration  process132.  The 
costs from the registration procedure and sanctioning regime would be reflected in fees, which 
would be low133 and proportionate based on provider size. This option could also result in 
some indirect commercial benefits from the positive perception of being a registered provider; 
however,  such  potential  benefits  are  not  possible  to  quantify.  Overall,  a  mixed  effect  of 
limited  costs  in  the  short  term  and  potential  benefits  in  the  long  term  would  be  expected 
relative to the baseline. 

  EU and national authorities: There would be limited costs for public authorities stemming 
from the registration procedure and  enforcement / sanctioning regime. These limited costs 
would mostly be passed onto providers as fees. As a result, public authorities would have 
basic information that can be used to monitor who is present in the market, but these would 
be also limited. 

Stakeholder  views:  Most  stakeholders  responding  to  the  targeted  consultation  (82%)  expressed 
support for a registration or authorisation requirement. The proportion was very similar for users and 
for rated entities, while 50% of responding ESG rating providers supported the requirement. 

6.1.3  OPTION  3:  AUTHORISATION,  PRINCIPLE-BASED  ORGANISATIONAL  REQUIREMENTS  AND 

RISK-BASED SUPERVISION 

This option would entail ESG rating providers being authorized by ESMA subject to proportionate 
rules for their  operations  and ongoing proportionate supervision.  The organisational  requirements 
would be principle-based and focus on independence, preventing or mitigating conflicts of interest, 
data  quality  assurance,  disclosure  of  key  information  about  business  models,  and  appropriate 
treatment of non-public information. 

Expected benefits: This option would fully meet the specific objective of increasing the clarity of 
providers’  operations  and  ensuring  the  prevention  of  risks  of  conflicts  of  interest.  Reliable  and 
transparent ESG ratings can contribute to reducing information asymmetry between companies and 
investors but also avoid important costs of analysing a large number of companies directly134. This 
would lead to a reduction of due diligence costs for users and rated entities and enable them to make 
more  informed  choices  of  ESG  rating  providers.  Providers  have  been  asked  to  quantify  this,  and 
while noting that there would be a reduction of due diligence costs, they noted that it is difficult to 
estimate this reduction in advance.135 Further clarity on the organisational policies of providers and 
the prevention or mitigation of conflicts of interests would also be beneficial to the market itself, by 
fostering  increased  trust,  reliability  and  useability  of  ESG  ratings  providers,  with  proportionate 
supervision offering an additional layer of security for users of ratings.  

132  As  confirmed  by  a  majority  of  interviewed  stakeholders.  There  were  limited  outliers,  which  mainly  pointed  at  a 
situation where establishment of a legal entity in the EU would be required. 
133 No precise figure was received from ESMA for the size of fees, but as the range of ESMA’s activity is much more 
limited compared to Option 3, it can be reasoned that its budget needs and supervisory fees covering them would be also 
significantly smaller (especially when levied on the market actors of the same size).  
134 Van Duuren, Plantinga, & Scholtens, 2016. 
135 As confirmed by a majority of interviewed ESG ratings providers, both through interviews and written feedback.  

38 

 
                                                 
Potential drawbacks: This option could entail relatively high costs for ESG rating providers (detailed 
below). The main driver of costs is mostly related to authorisation for both smaller and larger ESG 
rating providers. Further one-off adjustment costs are likely to arise in relation to the need to upgrade 
IT  systems  and  strengthen  internal  procedures,  but  estimates  are  difficult  to  obtain.  In  terms  of 
supervisory fees, they would be borne primarily by large providers (around 94% of the total). Smaller 
entities would bear only about 5% of the costs of supervision for ESMA. In order to prevent large 
cost impacts on smaller providers, the rate of supervisory fees would be very progressive, ranging 
from 0.37% to 2.4% of annual revenue. The ultimate impact of this increased cost on the market and 
availability of ESG ratings is not possible to quantify. The proportionality of this option and related 
requirements would need to be carefully ensured, and consider the impact on smaller players. 

Who is impacted and how: 

  Users of ESG ratings: Users would be expected to benefit from lower costs of due diligence 
when selecting providers given that there would be public information about business models, 
as well as regulatory oversight. The magnitude of this benefit is not possible to quantify given 
that  each  user  currently  faces  different  costs  of  due  diligence.  However,  of  all  options 
considered in this dimension, the benefit would be greatest under this option, since it would 
provide  the  most  reassurance  to  users  regarding  the  soundness  of  providers’  operations. 
Overall, a net benefit to users would be expected relative to the baseline. 

  Rated entities: Similar to users, rated entities would benefit from lower costs of due diligence 
when selecting providers; The magnitude of this benefit is not possible to quantify given that 
each rated entity currently faces different costs of due diligence. However, the benefit would 
be  greater  under this option  than under all other  options in  this  dimension, since it would 
provide  the  most  reassurance  to  rated  entities  regarding  the  soundness  of  operations  of 
providers. On the other hand, ESG rating providers may pass through part of their increased 
costs  to  rated  entities  in  the  form  of  higher  prices,  depending  on  the  providers’  business 
model. Overall, a net benefit to rated entities would be expected relative to the baseline. 

  ESG rating providers: This option would be expected to result in higher costs to ESG rating 
providers,  from  the  combination  of  one-off  costs  of  authorisation  and  ongoing  costs  of 
supervision (see Annex 3 and Annex 10 for further details). The costs stemming from initial 
authorisation would be around EUR 68 000 – 108 000 per provider, implying an expected 
total one-off cost of EUR 4 – 6.4 million136. Moreover, costs would arise from the introduction 
of ongoing supervision, which would lead to approximately EUR 6.7-10.6 million per year in 
total (from the provision of required documents and interaction with the supervisor during the 
supervisory review process). In particular, costs137 for smaller providers would range from 
approximately EUR 61-82 thousand per year138, while costs for larger providers would range 
from approximately EUR 284-490 thousand per provider per year. Additionally, ESG rating 
providers would pay supervisory fees to finance the cost of supervision by ESMA. The fees 

136  Commission  services  are  reflecting  on  possible  measures  to  mitigate  the  impact  of  the  authorisation  requirement, 
notably on smaller players. To ensure market players can continue operating, it is foreseen that they will be allowed to 
stay in the market after notifying ESMA, on the condition that they would complete the authorisation process within a 
pre-deterrmined time period. This would allow both market players (and the supervisor) to spread the costs in time and 
become compliant with the rules gradually.  
137 Costs of provision of required documents and interaction with the supervisory authority during the supervisory review 
process. 
138 The ongoing costs for smaller providers identified here are similar in size to the estimated compliance costs for external 
verifiers  in  the  impact  assessment  on  the  European  green  bond  standard.  This  also  suggests  that  expected  costs  are 
proportionate.  

39 

 
                                                 
would  be  proportionately  distributed  across  providers  based  on  their  revenues  and  are 
expected to range between 0.37% of revenues for smaller market players and 2.4% for larger 
ones based on a preliminary assessment by ESMA. Both supervisory fees and interaction with 
the  supervisor  would  hence  be  proportionate  to  provider’s  size,  mitigating  the  risk  of 
disproportionate impact on smaller providers. The requirements and process for supervision 
will be further operationalised via Level 2 measures to be adopted by ESMA. ESMA will 
carry out a further analysis of the impacts of such level 2 measures during their development, 
which will give a more precise assessment of the costs. Other mitigating measures for smaller 
providers,  such  as  transition  period  and  possibility  of  the  exemptions  from  certain 
organisational requirements that would not be proportionate to the nature, scale or business 
model of small provider, are described in Annex 5. There could be further adjustment costs 
depending  on  the  provider’s  existing  structure  and  need  to  align  further  with  the 
organisational requirements (e.g., separation of businesses and potential changes to internal 
governance). However, this option would also be expected to result in indirect commercial 
benefits to providers from the positive perception of being regulated and supervised, and from 
the expected growth of the market and greater confidence in ratings. 

  EU and national authorities: ESMA would be tasked with granting authorisations and with 
supervising the sector on an ongoing basis, which would require further resources. The total 
annual cost increase is estimated at approximately EUR 5.7 million. This cost would however 
not be borne by EU budget and would instead be passed onto ESG rating providers as fees139. 
The  authorisation  process  and  ongoing  supervision  would  at  the  same  time  allow  public 
authorities to have a better overview of the sector and use such information in monitoring 
activities. 

Stakeholder  views:  In  addition  to  the  support  for  a  registration  or  authorisation  requirement 
mentioned  under  the  previous  option,  a  large  majority  of  stakeholders  responding  to  the  relevant 
question  in  the  targeted  consultation  support  a  legislative  intervention  for  ESG  rating  providers, 
including 81% of users of ESG ratings, 86% of rated companies and 62% of ESG rating providers. 
However, in targeted interviews providers have indicated their concerns about potential costs linked 
to this approach. 

6.1.4  COMPARISON OF OPTIONS  

6.1.4.1  COMPARISON WITH REGARDS TO EFFECTIVENESS:  

Option 1 (Code of conduct) will be only partly effective as it would not fully address  the specific 
objectives of increased clarity on the characteristics of ESG ratings and  on the operations of ESG 
ratings providers The extent to which it will meet the specific objectives will depend on both the 
comprehensiveness  of  the  code  of  conduct,  and  the  extent  to  which  providers  will  adopt  and 
implement it. One of the main reasons for a lack of effectiveness could be the voluntary nature of the 
code. Experience indicates that codes of conduct generally suffer from low effectiveness. It is also 
important to remember that there were already at least two industry attempts to develop a code of 
conduct which failed due to a low take-up. 

Option 2 (registration and light supervision) will be more effective. It will meet partly the objective 
of providing more clarity of operations of ESG rating providers by requiring that providers register 
and disclose a certain level of information about their business models. Users or rated companies 

139  Relative  size  of  the  fees  is  described  under  impacts  on  ESG  rating  providers.  Passing  costs  of  supervision  onto 
supervised entities is a typical practice in the financial sector.  

40 

 
                                                 
would be able to consult the registry to better understand providers’ operations. However, this option 
only provides for enforcement regarding registration requirements. The lack of clear organisational 
requirements and their enforcement may be ineffective in ensuring the prevention or mitigation of 
conflicts  of  interests.  This  will  depend  on  the  impact  of  higher  business  model  transparency,  the 
pressure exerted by market participants and the role of reputational effects. 

Option  3  (authorisation,  organisational  requirements  and  supervision)  will  be  most  effective  in 
reaching  the  objectives  referred  to  above.  This  option  would  fully  meet  the  specific  objective  of 
increasing clarity and ensuring that providers manage conflict of interests. Furthermore, oversight 
will help to improve the quality and reliability of ESG ratings. This would increase overall trust in 
ESG ratings and contribute to better allocation of ESG investment. 

6.1.4.2  COMPARISON WITH REGARDS TO EFFICIENCY (COST-EFFECTIVENESS):  

Option 1 (Code of conduct) would lead to minimal voluntary costs for ESG rating providers who 
choose to participate in the development and implementation of the Code of Conduct. Overall, this 
option would be somewhat efficient as it would entail minimal costs but obtain limited benefits. 

Option 2 (registration and light supervision), would result in negligible to low compliance costs for 
all ESG rating providers to be registered. Overall, this option would be  somewhat efficient, since 
despite  slightly higher costs  compared to  Option  1,  there would be a  potential for slightly  higher 
benefits. 

Option  3  (authorisation,  organisational  requirements  and  supervision)  would  result  in  potentially 
significant costs to ESG rating providers particularly in the short term, from the combination of one-
off costs of authorisation and ongoing costs of supervision. Additionally, in order to limit the negative 
impact on smaller providers, a number of mitigating measures as described in Annex 5. are foreseen 
Overall, this option may be less efficient than other options in the short term, but in the long term the 
benefits would be expected to outweigh the costs, since this option would also result in the highest 
benefits  to  rating users and rated entities,  as well as providers themselves and  society  at  large.  It 
would lead cost savings from lower due diligence costs for users and rated entities. Increased quality 
and reliability would increase overall trust in ESG ratings and contribute to better allocation of ESG 
investment,  thus  serving  the  objectives  of  the  EU  Green  Deal  and  various  UN  Sustainable 
Development Goals, to the benefit of society at large. It would also fuel growth of the ESG ratings 
market,  benefiting  providers  themselves  and  potentially  improving  coverage  of  rated  entities, 
including those who currently find it difficult or too costly to be rated. 

6.1.4.3  COMPARISON WITH REGARDS TO POLICY COHERENCE: 

Option 1 (Code of Conduct) would not contradict EU law but would only be partially aligned with 
the  overall  EU  Sustainable  Finance  Strategy  and  the  objective  to  bring  further  clarity  on  the 
operations of financial market participants. The EU has introduced rules on the operations of the vast 
majority  of  financial  market  participants  (e.g.,  credit  rating  agencies,  benchmark  administrators, 
investors, banks, insurance companies, green bond verifiers) with the objective to ensure a capital 
market union and financial stability. Those pieces of legislation require the registration / authorisation 
of  market  participants  in  order  to  offer  their  services  in  the  EU.  They  are  also  subject  to  rules 
regarding  their  operations,  in  particular  for  credit  rating  agencies,  benchmark  administrators  and 
green bond verifiers, rules on their input data and transparency of methodologies. A code of conduct 
that could also be facilitated and supported by the Commission and followed and applied by market 
participants would provide additional transparency and clarity than what is currently the case but it 
would also come with a number of risks. More specifically, it is unsure what would be the take up of 
this code, and how many market players would adhere and abide by it and its rules. The absence of 

41 

 
clear  and  strict  requirements  to  be  applied,  including  oversight,  would  also  not  achieve  the  full 
objectives of this initiative. 

Option 2 (registration and light supervision) would not contradict EU law and would bring additional 
transparency and clarity on the market of ESG rating providers, but it would not follow the approach 
taken  for  other  pieces  of  legislation  on  financial  services  e.g.,  credit  rating  agencies,  benchmark 
administrators and green bond verifiers for what concerns in particular supervision. In particular, in 
those other relevant frameworks, financial market participants are subject to ongoing supervision in 
order to ensure that their activities respect established rules on an ongoing basis, not just at the time 
of registration/authorisation. 

Option  3  (authorisation,  organisational  requirements  and  supervision)  would  be  aligned  with  the 
approach taken for other financial market participants and relevant legislation, e.g. EU Benchmark 
Regulation, Credit Rating Agencies Regulation and EU Green Bond Standard proposal that provide 
for an ongoing supervision and a number of organisational requirements, processes and documents 
concerning governance structure to be complied with (e.g. rules on input data, adopt, implement and 
enforce  adequate  measures  to  ensure  that  the  ratings  issued  are  based  on  a  thorough  analysis, 
prevention  and  management  of  conflicts  of  interests,  record  keeping  requirements).  A  number  of 
ESG rating providers also have in their structure other activities such as benchmark administrators 
(e.g.,  MSCI),  credit  rating  agency  (e.g.,  Moody’s)  or  green  bond  verifiers  (e.g.,  ISS)  and  some 
synergies can be expected. They also have experience with dealing with authorisation process and 
ongoing supervision, which could help reduce overall costs linked to the introduction of a regulatory 
framework on their ESG rating activity. 

Table 1 below provides a high-level summary of how the previously described options compare  

Table 1: Comparison of the policy options to reduce the vulnerability of the EU and its operators 

Effectiveness 

Efficiency 

(Cost-effectiveness) 

Coherence 

Option 1 – Industry Code of Conduct for 
ESG rating providers 

Option 2 – Registration and light 
supervision 

Option 3 – Authorisation, principle-based 
organisational requirements and risk-based 
supervision 

+/- 

+ 

++ 

+ 

+ 

+/- 

 +/- 

+ 

++ 

Legend: 

++ = Positive 

+ = Slightly positive   +/- = Mixed effect                 

0 = no effect 

- = Slightly negative 

-- = Negative 

Conclusion: Based on the above assessment and comparison of options, Option 3 is the preferred option. 
While Option 3 implies higher costs for the sector, it is expected to result in significantly higher benefits for 
users and broader society that justify its selection. 

42 

 
 
 
 
 
 
6.2  OPTIONS ON TRANSPARENCY REQUIREMENTS 

6.2.1  IMPACTS OF THE POLICY OPTIONS 

6.2.1.1  OPTION 1 - MINIMUM TRANSPARENCY TOWARDS THE PUBLIC 

This  option  would  require  all  providers  to  disclose  publicly  key  information  about  ESG  rating 
characteristics and methodologies. Precise disclosure requirements would be developed in delegated 
acts,  the  scope  of  which  would  be  framed  in  the  legislation,  however  standardized  disclosure 
templates would not be foreseen. 

Expected benefits: This option would be expected to partially address the needs of users and rated 
entities for greater transparency on ESG ratings’ objectives, methodologies and underlying data. This 
would lead to a reduction of due diligence costs for users and rated entities and a more informed 
choice of ESG rating provider. Anecdotal evidence140 suggests that an asset manager can require the 
work of 6-8 full time employees (FTEs) just to  understand the methodologies and data processes 
behind  an  ESG  rating  service,  a  cost  which  would  be  expected  to  be  reduced  with  minimum 
transparency requirements based on responses from asset managers. Similarly, anecdotal evidence141 
from rated entities suggests 2 or more FTEs are needed to deal with the rating processes of different 
providers,  while  greater  transparency  would  allow  the  entity  to  make  a  more  informed  choice  of 
provider and avoid multiple processes. 

It would also improve the protection of investors against potential greenwashing, including on social 
and governance factors. This is expected to lead to better, science based, data-driven decisions that 
facilitate  an  orderly  transition  to  a  sustainable  economy.  Indirect  benefits  stemming  from  greater 
transparency  would  include  an  increase  in  ratings  quality  and  fitness  for  purpose.  These  would 
increase  overall  trust  in  ESG  ratings  and  contribute  to  better  allocation  of  ESG  investment,  thus 
serving the objectives of the EU Green Deal and various UN Sustainable Development Goals, to the 
benefit of society at large. According to EFAMA statistics, by the end of Q1 2021, asset managers in 
Europe applied an ESG investment approach to approximately EUR 11 trillion of assets142. Even a 
small improvement in the allocation of such an amount of investments could have a positive impact 
on ESG objectives. 

Potential drawbacks: This option may not fully address the objective of increased clarity across the 
market,  since  the  limited  disclosure  requirements  would  not  cover  all  relevant  methodological 
information.  As  for  rating  providers,  they  would  face  moderate  costs  of  compliance  which  are 
described  below.  There  could  be  some  impact  of  the  costs  of  compliance  on  the  market  and 
availability of ESG ratings at least in the short term, but how much is difficult to quantify. In the 
medium  term,  however,  greater  confidence  in  ESG  ratings  and  higher  expected  usage  would  be 
expected to lead to market growth and attractiveness. 

Who is impacted and how: 

  Users of ESG ratings: Users would be expected to benefit from lower costs of due diligence 
to  understand  ESG  ratings  and  their  methodologies.  Anecdotal  evidence  outlined  above 
demonstrates  that  FTE  costs  would  be  expected  to  decrease  to  some  degree  thanks  to  the 
requirements for minimum transparency and clarity. Users would also better understand the 
limitations  of  ESG  ratings  and  thus  use  them  appropriately.  A  large  asset  manager  has 

140 Based on targeted interviews with asset managers. 
141 See footnote above. 
142 EFAMA Asset Management Report 2021. 

43 

 
                                                 
indicated that this could also help when considering their clients’ questions/request or media 
attention  focusing  on  ESG  ratings.  Prospective  users  would  also  benefit  from  greater 
transparency from providers, as it would help them make a more informed selection. On the 
other hand, ESG rating providers may pass on part of their increased costs to users in the form 
of higher prices, depending on the providers’ business model. Overall, a net benefit to users 
would be expected relative to the baseline. 

  Rated entities: Similarly to users, (prospective) rated entities would benefit from lower costs 
of due diligence to understand and make informed choices regarding ESG ratings and their 
methodologies; the magnitude of this benefit is not possible to quantify given that each rated 
entity has a different maturity in the area, different resources, needs and costs of due diligence. 
Anecdotal evidence from rated entities suggests 2 or more FTEs are needed just to deal with 
the rating processes of different providers, while greater transparency  could allow them to 
save up a part of these costs. On the other hand, ESG rating providers may pass through part 
of  their  increased  costs  to  rated  entities  in  the  form  of  higher  prices,  depending  on  the 
providers’ business model. Overall, a net benefit would be expected relative to the baseline. 

  ESG rating providers: This option would be expected to result in moderate costs to ESG 
rating providers, stemming from the implementation of the new disclosure requirements. The 
one-off costs due to collecting relevant data and describing characteristics and methodologies 
of ESG ratings and operations of ESG rating providers have been estimated in the range of 
EUR 3 700 – 5 000 per provider, and approximately EUR 220 – 295 thousand in total143. 
Ongoing  costs  related  to  annual  updates  of  the  information  and  compliance  checks  are 
expected in the range of EUR 6 500 – 16 200 per provider and approximately EUR 380 – 955 
thousand in total. These costs would vary depending on the provider’s internal governance, 
product complexity, number of rating products and existing level of transparency. However, 
this  option  would  also  be  expected  to  result  in  moderate  indirect  commercial  benefits  to 
providers  from  the  greater  transparency  and  the  positive  perception  of  compliance  with 
regulatory requirements. 

  EU and national authorities: Depending on the option chosen on regulatory treatment of 
ESG rating providers, there would be either limited or more thorough enforcement of rules 
on  disclosures.  This  would  require  staffing  on  ESMA  side,  which  is  accounted  for  in  the 
estimate under Option 3 on regulatory treatment144.Costs of supervision would be passed on 
to rating providers via supervisory fees, that would be adapted to their size and revenues. 

Stakeholder views: Almost all stakeholders (98%) who call for legislative intervention in their reply 
to the targeted consultation have expressed support for minimum disclosure requirements. Variations 
among stakeholder groups are outlined below. 

The vast majority (94%) of respondents believe there should be minimum disclosure requirements in 
relation to providers’ methodologies, but they are less aligned on standardisation of templates with 
only a slight majority (51%) supporting the latter. Users desire transparency on methodological items 
(covering both high-level and the individual rating level) such as whether it reflects risks or impact 
(or another factor), the materiality assessment for each sector and rated company, which metrics have 
been selected as relevant, and what weight has been attributed to each of these, whether AI has been 

143 While stakeholder replies varied in this regard, it seems safer to assume that to obtain the total costs of the first year 
of disclosures, one has to add the ongoing cost element presented below to this one-off cost element.  
144 The estimate was provided as an aggregate, which does not allow to separate out the cost of supervising disclosures 
from the cost of supervising operations. 

44 

 
                                                 
used or not, the integration of national or company specificities, changes to rating methodologies, 
reasons  for  changes  to  ratings,  whether  controversies  are  included  or  not,  whether  analysis  is 
backward-looking or forward-looking, etc. 

Almost all responding rated entities (93%) believe there should be minimum disclosure requirements 
in  relation  to  providers’  methodologies, and the  majority  (56%) believe these should be done via 
standard templates. In terms of transparency, rated entities want similar disclosures as investors, but 
point out that if these are not made public, they need to be communicated at least to the rated entities 
themselves. Rated entities seem to expect more granular methodological disclosures than investors 
do. 

The large majority of responding rating providers (88%) believe there should be minimum disclosure 
requirements  in  relation  to  providers’  methodologies,  but  unlike  the  other  respondents,  only  38% 
respondents believe these should be done via standard templates. In terms of transparency, they seem 
to  generally  agree  on  the  need  for  methodology  disclosures  –  at  least  to  users.  One  respondent 
cautioned that commercial secrets should not be made known to competitors as that would discourage 
innovation. 

6.2.1.2  OPTION 2 - MINIMUM TRANSPARENCY TOWARDS THE PUBLIC AND MORE COMPREHENSIVE 
DISCLOSURES TO CLIENTS OF ESG RATING PROVIDERS AND RATED COMPANIES 

This option would require that providers disclose, in addition to the public disclosures under Option 
1, additional granular methodological information to their subscribers and to rated companies. 

Expected benefits: This option would achieve all of the benefits outlined above under the expected 
benefits for Option 1. It would address the specific objective to a greater degree, meeting most of the 
needs of users and rated entities for greater transparency on ESG ratings’ objectives, methodologies 
and  underlying  data.  The  higher  granularity  of  disclosures,  as  evidenced  in  responses  of  asset 
managers, would lead to a considerable reduction of due diligence costs for users of ESG ratings and 
enable a more informed choice of ESG rating provider, as well as more efficient use of ratings as a 
result of better understanding of the links between methodologies and individual ratings.  

Potential  drawbacks:  Under  this  option,  rating  providers  would  face  relatively  larger  costs  of 
compliance (described below). However, of all the costs assessed arising from this initiative, the costs 
of complying with transparency requirements would be the lowest for providers, as many of them 
already currently provide information to users in varying degrees and formats. The ultimate impact 
of  those  costs  on  the  market  and  availability  of  ESG  ratings  is  not  possible  to  quantify.  The 
proportionality  of  this  option  and  related  requirements  is  essential.  The  precise  disclosure 
requirements would have to be carefully calibrated in  Level 2 to minimise this impact on smaller 
providers. If providers were to exit the market, users and rated entities would also ultimately suffer 
from lower competition among providers. 

Who is impacted and how: 

  Users  of  ESG  ratings:  Users  would  be  expected  to  significantly  benefit  from  this  policy 
option as they would better understand ESG ratings and their limitations. This will make them 
more likely to use ESG ratings more efficiently and select rating products best suited to their 
needs. Users also expect to save up costs they currently expend on due diligence to understand 
the offered ESG ratings and their methodologies. The magnitude of this benefit is difficult to 
quantify  given  that  each  user  has  different  resources,  needs  and  costs  of  due  diligence. 
However,  this  benefit  is  expected  to  be  rather  large,  as  illustrated  by  the  following 
hypothetical example: assuming that each asset manager in the EU would save just 0.5-1.3 
FTEs due to the additional transparency, it would translate into cost savings of approximately 

45 

 
EUR  110-290  million  annually  (more  details  available  in  Annex  3)145.    The  total  savings 
would  likely  be  higher  considering  other  user  groups  would  also  benefit.  Such  benefit  is 
expected to be significantly greater than under Option 1, as users report that they need more 
granular information on methodologies to be sufficiently sure in their choice and use of ESG 
ratings.  Indeed,  asset  managers  indicate  that  even  when  their  providers  make  information 
available publicly, they still have to make further enquiries to gain sufficient understanding 
of the products. This additional need would be largely met with this policy option, so asset 
managers expect a significant reduction in time spent on due diligence and reaching out for 
more information from providers. On the other hand, ESG rating providers may pass through 
part of their increased costs to users in the form of higher prices, depending on the providers’ 
business model. Overall, a significant net benefit would be expected relative to the status quo. 

  Rated entities: Similarly to users, (prospective) rated entities would benefit from lower costs 
of  due  diligence  to  understand  ESG  ratings  and  their  methodologies  and  make  informed 
choices; the magnitude of this benefit is not possible to quantify given that each rated entity 
has  a  different  maturity  in  the  area,  different  resources,  needs  and  costs  of  due  diligence. 
Anecdotal evidence from rated entities suggests 2 or more FTEs are needed just to deal with 
the rating processes of different providers, while greater transparency would allow the entity 
to  make  a  more  informed  appropriate  choice  of  provider  and  avoid  multiple  processes. 
Moreover, the benefit would be significantly would be greater under this option than under 
Option 1.  On the other hand, ESG rating providers may pass through part of their increased 
costs  to  rated  entities  in  the  form  of  higher  prices,  depending  on  the  providers’  business 
model. Overall, a significant net benefit would be expected relative to the status quo. 

  ESG rating providers: This option would result in relatively higher costs of compliance to 
ESG rating providers than under Option 1, including both one-off costs (collecting relevant 
data and describing characteristics and methodologies of ESG ratings and of their operations) 
and ongoing costs (annual updates of the information and compliance checks) of disclosure 
requirements. The one-off costs have been estimated in the range of EUR 7 500 – 15 000 per 
provider, and approximately EUR 440 - 880 thousand in total146. The ongoing costs have been 
estimated in the range of EUR 13 000 – 29 000 per provider, and approximately EUR 770 
thousand  to  1.7  million  in  total.  Stakeholders  further  observed  that  these  costs  may 
significantly  vary  depending  on  the  required  granularity  of  disclosures  and  the  scope  and 
number of products, sectors, entities, or instruments covered.  In terms of positive impacts, 
this option would be expected to result in at least moderate indirect commercial benefits to 
providers  from  the  greater  transparency  and  the  positive  perception  of  compliance  with 
regulatory requirements, to a greater extent than under Option 1. 

  EU and national authorities: Depending on the option chosen on regulatory treatment of 
ESG rating providers, there would be either limited or more thorough enforcement of rules 
on  disclosures.  This  would  require  staffing  on  ESMA  side,  which  is  accounted  for  in  the 

145 For instance, one medium-sized asset manager indicated that they currently need up to 6-8 FTEs just to understand 
the methodologies and data processes behind an ESG ratings, a cost which would be expected to fall significantly with 
sufficient transparency and clarity. Responses of other asset managers have mostly supported a rather significant effect 
of more comprehensive disclosures. 
146 While stakeholder replies varied in this regard, it seems safer to assume that to obtain the total costs of the first year 
of disclosures, one has to add the ongoing cost element presented below to this one-off cost element.  

46 

 
                                                 
estimate under Option 3 on regulatory treatment147. Costs of supervision would be passed on 
to rating providers via supervisory fees, that would be adapted to their size and revenues.  

Stakeholder views: As explained under Option 1, the vast majority of stakeholders (98%) who call 
for legislative intervention in their response to the targeted consultation have expressed support for 
minimum  disclosure  requirements.  Additional  interviews  supported  that  around  a  third  of 
stakeholders who expressed an opinion on the content of such disclosure requirements called for very 
comprehensive  and  granular  disclosures,  some  requesting  fully  public  methodologies.  For  these 
respondents – and particularly asset managers and rated entities, Option 2 would likely be preferable 
to Option 1 as the former goes further in terms of the disclosures. Providers’ concerns on commercial 
sensitivity would also be addressed, as the more granular disclosures would only be required towards 
the client base and rated entities. 

6.2.2  COMPARISON OF OPTIONS 

6.2.2.1  COMPARISON WITH REGARDS TO EFFECTIVENESS: 

Option 1 (minimum transparency) would partially address the needs of users and rated entities for 
greater transparency on ESG ratings’ objectives, methodologies and underlying data. It would ensure 
the availability of general information allowing investors to understand and compare the objectives 
of ESG ratings provided by various providers. It would also improve the protection of retail investors 
against potential greenwashing. Retail investors and the public at large will be given explanations 
about the objectives and general characteristics of ESG ratings.  It will not, however, meet the needs 
of subscribers and rated companies to have a more in-depth understanding of the methodologies and 
data used. Option 2 (minimum transparency to the public and additional disclosures to clients and 
rated  entities)  would  fully  address  the  specific  objective  by  meeting  the  needs  of  users  and  rated 
entities. It will ensure that subscribers and rated companies will receive sufficient explanations about 
the methodologies and data used by ESG rating providers and consequently ensure that they take 
informed investment decisions.  

6.2.2.2  COMPARISON WITH REGARDS TO EFFICIENCY (COST-EFFECTIVENESS):  

Option 1 (minimum transparency to the public), would result in moderate costs for all ESG rating 
providers in order to meet the disclosure requirements. However, there would be direct benefits for 
rating users and rated entities, stemming from lower due diligence costs when selecting providers 
and more appropriate usage of ratings. Providers would also have some indirect commercial benefits 
from  the  additional  transparency.  Moreover,  the  ultimate  result  of  better  allocation  of  ESG 
investment, thus serving the EU Green Deal and various UN Sustainable Development Goals, would 
benefit society at large. Overall, this option is considered to be cost-effective. 

Option 2 (minimum transparency to the public and additional disclosures to clients and rated entities), 
would result in potentially important costs for all ESG rating providers in order to meet the disclosure 
requirements,  particularly  in  the  short  term.  However,  it  would  also  result  in  the  highest  direct 
benefits for rating users and rated entities, stemming from lower due diligence costs when selecting 
providers, more efficient engagement with providers, more efficient investment processes and more 
efficient use of their data budgets. Providers would also have some indirect commercial benefits from 
the additional transparency, likely to a greater degree than under Option 1. Moreover, the ultimate 
result  of  better  allocation  of  ESG  investment,  thus  serving  the  EU  Green  Deal  and  various  UN 

147 The estimate was provided as an aggregate, which does not allow to separate out the cost of supervising disclosures 
from the cost of supervising operations. 

47 

 
                                                 
Sustainable Development Goals, would benefit society at large. This impact would be expected to be 
greater and also materialize quicker under Option 2 than under Option 1. Considering the size of the 
ESG investment ecosystem, this benefit should not be underestimated. Overall, this option would be 
less cost-effective in the short term than Option 1, but over the long-term benefits would be expected 
to outweigh the costs. 

6.2.2.3  COMPARISON WITH REGARDS TO POLICY COHERENCE: 

Option  1  (minimum  transparency  to  the  public)  would  be  aligned  with  EU  law,  and  follow  the 
approach taken for disclosures related to financial institutions e.g., credit rating agencies, where the 
latter have to publicly disclose the methodologies, models and key rating assumptions it uses in its 
credit rating activities. It would also follow the approach taken in the Benchmark Regulation, where 
benchmark administrators should publish or make available (to the public) information on the key 
elements of the methodology, details of the internal review and the approval of a given methodology, 
as well as the frequency of such review, etc. This option would have to be limited to information that 
is necessary, not to hamper the business model / commercial activities from ESG rating providers. 
One should not have to disclose information that would directly have negative competitive effect or 
affect their intellectual property rights.  

Option 2 (minimum transparency to the public and more comprehensive disclosures for clients of 
ESG rating providers and rated companies, organisational requirements and supervision) would not 
be  contrary  to  EU  law  and  would  be  aligned  with  the  overall  sustainable  finance  agenda  and  the 
objective  to  bring  transparency  and  trust  to  financial  markets,  where  market  participants  need 
granular information to take informed decisions. 

Minimum disclosure requirements would not achieve that objective as it would not help in particular 
those  professional  investors  and  companies  that  need  detailed  information  for  their  investment 
strategies,  looking  into  risks/impacts  but  also  opportunities.  This  option,  also  linking  with 
considerations  for  ESG  rating  providers  to  report  as  to  whether  they  have  considered  CSRD 
disclosure requirements for the creation of ESG ratings will help provide more comparability and 
trust to the market. 

It could also be considered that differentiating the disclosures by the type of recipient (users / rated 
companies)  would  go beyond  some legislations that  generally limit  the disclosures  to  the  general 
public. However, given the horizontal nature and impacts of this initiative (see further interactions 
with other sustainable finance initiatives in Annex 4), the diversity and complexity of the market, 
that has different business models (user / subscriber pay and issuer pay), which is different from other 
financial services markets that generally have one type of offering (e.g. the market of credit rating 
agencies  is  issuer  based  only,  hence  disclosures  are  targeted  to  this  type  of  client  only),  such 
differentiation in terms of who received what information is necessary. Users of ESG ratings have 
different needs from companies that are the subject of ratings. Similarly to the option above, this 
option would have to be limited to information that is necessary to inform market participants. 

Table 2 below provides a high-level summary of how the previously described options compare  

Table 2: Comparison of the policy options to reduce the vulnerability of the EU and its operators 

Effectiveness 

Efficiency 

(Cost-effectiveness) 

Coherence 

Option 1 – Minimum transparency to the public 

+ 

+/- 

++ 

48 

 
 
 
 
Option 2 – Minimum transparency to the public and 
more comprehensive disclosures for clients of ESG 
rating providers and rated companies 

++ 

+/- 

++ 

Legend: 

++ = Positive 

+ = Slightly positive   +/- = Mixed effect                 

0 = no effect 

- = Slightly negative 

-- = Negative 

Conclusion: Based on the above assessment and comparison of options, Option 2 is the preferred option. 

7.  PREFERRED OPTION 

7.1  SUMMARY OF PREFERRED OPTION 

On the basis of the  comparison of options  carried  out in  Chapter 6.2. the preferred option would 
combine  Option  3  on  authorisation,  proportionate  organisational  requirements  and  risk-based 
supervision of ESG rating providers together with Option 2 on the transparency requirements. 

The preferred options provide for the authorisation, proportionate organisational requirements 
and risk-based supervision of ESG rating providers and minimum transparency to the general 
public plus more granular information to users and rated companies. 

The preffered option presents the most efficient and effective combination of options in relation to 
meeting the objectives of the inititative. 

Key elements of the preffered options: 

  authorisation 
  ongoing supervision 
  organisational requirements 
  disclosure requirements  

Authorisation is  necessary to  ensure that ESG rating providers meet  a certain  number of quality 
requirements (organisational requirements) before they can offer services to clients or rate companies 
under the scope of this initiative.  

The  authorisation  in  combination  with  the  organisational  requirements  ensures  addressing  the 
problem  about  the  lack  of  clarity  about  and  control  of  operations  of  ESG  rating  providers  and 
addresses the problem of conflict of interests in relation  to ownership, product mix, separation of 
commercial  and  analytical  teams,  and  governance  and  quality  assurance.  The  authorisation,    not 
combined with the organisational requirments, would not be effective in meeting the objective of …. 

In order to limit the burden for regulated entities, organizational requirements will be principle-based. 
This will give the regulated entities the flexibility to adapt the requirements to the specificities of 
their organisations and should reduce the burden on small and medium-sized providers. In addition, 
we foresee a number of mitigating measures for smaller providers, described in Annex 5 “SME Test”. 

 Ongoing supervision requirements are necessary for ensuring that providers fulfil their obligations, 
both in terms of how they operate, whether they meet the organisational requirements, but also in 
terms of what they disclose to the general public as well as users.. Ongoing supervision is a necessary 
condition for the proper enforcement. 

49 

 
 
 
 
Disclsoure requirements: The effectiveness and impact of disclosure requirements depend on their 
enforcement  and  therefore  its  effectivenss  depends  on  other  key  elements  like  n  authorisation, 
organisational requirements and supervision of ESG rating providers.  

Summing up, only the combination of all key elements will facilitate meeting the objectives of the 
initiatitve in the most effective and efficient way. 

Supervision 

ESG  rating  providers  falling  within  the  scope  of  this  initiative  would  be  subject  to  ongoing 
supervision by ESMA. 

ESMA  has  adopted  a  risk-based  and  data-driven  approach  when  conducting  supervision  and 
prioritises its supervisory activities according to the level of risk identified and outcomes it targets. 
A  risk  analysis  is  used  to  identify  areas  of  possible  non-compliance  and  to  assess  the  potential 
significance of the issue. Risks are identified by collecting and assessing information from different 
sources like periodic and ad hoc notifications submitted by the entities, registration application files, 
meetings/calls  with  entities,  data  analysis,  on-site  inspections/investigations,  etc.  To  identify  key 
priority areas for supervision, ESMA considers the result of its supervisory risk assessment, and key 
market trends in the respective industries and capital markets more broadly. 

The result of the risk analysis is a ranking / mapping of the supervised entities and the risks related 
to their functioning. The supervisory work programme is prepared on the basis of this risk analysis. 
The outcome of the risk analysis is taken into consideration when monitoring the work programme, 
as emerging risks may trigger deviations or adjustments to the initially planned work programme. 
ESMA can use different supervisory tools to address risks, e.g., engagement with supervised entities, 
the  development  of  policy  tools,  conducting  investigations  and  requesting  supervised  entities  to 
implement a remedial action plan. Where breaches of the regulation have been identified, ESMA will 
adopt  timely  enforcement  actions,  that  could  range  from  the  issuance  of  public  notices  to  the 
imposition of fines and the withdrawal of registration/authorisation. 

7.2  LEGISLATIVE APPROACH 

The  legislation  would  lay  down  the  organisational  requirements,  authorization  process  and 
transparency requirements to which ESG rating providers would be subject, as well as grant ESMA 
the necessary supervisory powers. The “level 2 measures” will operationalize the organizational and 
transparency requirements laid down by the level 1 measure, by specifying information needed for 
the authorisation process and further specifying disclosure requirements. ESMA will be responsible 
for the elaboration of these Level 2 measures and will be required to carry out a further analysis of 
the  impacts  of  such  level  2  measures,  which  will  give  a  more  precise  assessment  of  the  costs 
stemming from the level 2 measures.  

7.3  COMBINATION OF OPTIONS, DISCARDED AT EARLY STAGE 

We  have  pre-analysed  the  possibility  of  alternative  combinations  of  options  on  the  regulatory 
treatment and transparency, and decided to present and analyse the most feasible and impactful ones 
in order to keep the structure of the Impact Assessment as simple as possible. 

For  example,  a  combination  of  the  light  regime  (option  1  on  a  code  of  conduct  or  2  on  light 
registration) with the transparency requirements would not be effective, as in the case of options 1 
and  2,  no  continuous  supervision  is  foreseen.  Absent  ongoing  supervision,  the  efficiency  of  the 
transparency requirements would be very limited.  

50 

 
Option 1 (code of conduct) cannot be combined with continuous supervision, as codes of conduct are 
by nature voluntary. The positive impacts of the voluntary ESMA Guidelines on CRAs stem from 
the fact that ESMA Guidelines supplement existing level 1 and level 2 legislation as well as from the 
fact that ESMA has a range of supervisory tools in relation to CRAs. ESMA Guidelines are part of a 
comprehensive  legal  and  supervisory  framework.  A  soft  approach  towards  ESG  rating  providers, 
either  in  the  form  of  a  recommendation  or  guidelines  could  not  have  similar  effect  as  ESMA 
Guidelines supplementing level 1 and level 2 legislation. 

As for option 2 on regulatory treatment, it foresees requirements in relation to registration, including 
the enforcement of those requirements. We could have combined it with Option 1 on transparency, 
however, given the limited scope of the enforcement foreseen (only in relation to the requirements 
for  registration),  it  would  not  have  the  required  impact  since  it  would  not  be  subject  to  ongoing 
supervision.  We  have  therefore  decided  not  to  present  such  an  option,  for  the  sake  of  avoiding 
repetitive arguments.  

7.4 

IMPACTS OF PREFERRED OPTION  

This initiative is expected to bring transparency and clarity to the operations of ESG rating providers 
hence benefitting users of those ratings but also rated companies and other interested stakeholders. It 
will contribute to the objectives of the EU Green Deal and sustainable finance strategy. 

The initiative will have significant direct and indirect economic impacts on the relevant parties. First, 
ESG rating providers will be subject to disclosure and other operational requirements, implying costs. 
Then,  ESG  rating  users  and  rated  entities  will  benefit  from  more  transparency  on  ESG  rating 
characteristics and operations of ESG rating providers. Public authorities will also be impacted, in 
particular with the introduction of supervision of ESG rating providers, even if within existing bodies. 
These impacts have been described under each option in Chapter 6. This initiative can have a number 
of indirect  impacts  on other key  economic, social and environmental factors, as further described 
below. As these impacts would not vary widely among the different options, nor be expected to be 
significant, for ease of reading they have been described here only once for the preferred option. 

7.4.1  ECONOMIC IMPACTS 

First,  the  initiative  would  be  expected  to  have  a  positive  impact  on  the  functioning  of  financial 
markets and the conditions for investment, particularly in relation to ESG investing, considering the 
important role that ESG ratings play in this ecosystem. The preferred option should enable investors, 
and rated entities, to understand and make informed choices regarding ratings. Indeed, ESG ratings 
are  expected  to  gradually  increase  in  quality  and  fitness-for-purpose,  thus  enabling  investors  and 
rated companies to take informed decisions regarding ESG-related risks, impacts and opportunities. 
Users will also better understand the limitations of ESG ratings, so they use them appropriately. The 
higher  trust  in  ratings  and  their  higher  fitness  for  purpose  should  lead  to  more  efficient  capital 
allocation and more sustainable investment. Additionally, the initiative is expected to benefit rating 
users  and  rated  entities,  by  reducing  the  costs  of  gathering  information  or  the  need  to  use  extra 
providers, thus decreasing their costs of doing business. 

Then, the initiative may have an impact on the general competitiveness of the ESG ratings providers. 
The cost of doing business for these companies will likely increase, at least in the short term, due to 
additional costs to comply with requirements on transparency and operations, but increased trust in 
ESG ratings  could  enhance market  growth  eventually leading to  more  profitability. Similarly, the 
capacity to innovate in this sector may be temporarily reduced due to the increased cost of business, 
but the opportunities provided by a larger market are expected to incentivize greater innovation in 
the  medium  term..  Finally,  the  new  requirements  potentially  have  a  bigger  impact  on  smaller 

51 

 
providers, with some adminstrative burden and costs of organisational changes but it could also give 
more  visibility  to  their  operations.  The  increased  costs  of  providing  ESG  ratings  may  affect  the 
market structure and share of individual providers, reinforcing consolidation trends It is not possible 
to estimate to what extent an increase in additional costs could affect the market shares of existing 
players, as it is not possible to disaggregate the effect of the new requirements from the market trends: 
in the last years we have seen quite a few mergers and acquisitions and they are likely to continue. 

 However, in order to mitigate impacts on smaller providers, this initiative will include a number of 
mitigating measures such as: transition period for small providers, adjustment of supervisory fees to 
the  size  of  the  provider,  proportionate  supervision  and  the  possibility  for  smaller  and  innovative 
entities  to  ask  for  some  exemptions  from  a  wide  range  of  internal  organisational  measures  under 
certain conditions (please see Annex 5 SME Test). 

The initiative may have an impact on providers operating from third countries as they would have to 
meet the minimum requirements to be able to provide their services in the EU. However, the preferred 
option would be origin neutral as it would apply equally to domestic and third country operators on 
this  market.  In  this  instance,  it  was  not  possible  to  aim  for  regulatory  convergence  or  common 
regulatory approaches with other jurisdictions, since there are currently no other binding regulatory 
frameworks,  only  a  set  of  recommendations  from  IOSCO  (Annex  7).  Hence,  the  initiative  could 
potentially  impact  the  competitiveness  of  European  providers  in  non—EU  markets,  where  they 
would need to compete with unregulated third country providers. Given the niche and mostly local 
nature of most (smaller) European providers, this impact is not expected to be significant. 

Finally, the potential impacts of the initiative on the operation and competitiveness of SMEs have 
been discussed in detail in Annex 5. 

7.4.2  IMPACT ON UN SUSTAINABLE DEVELOPMENT GOALS (SDGS) 

This initiative is expected to directly or indirectly contribute to the achievement of all SDGs (with 
possible  exception  of  SDG  16)  and,  in  particular,  to  the  achievement  of  SDG  12  (responsible 
production and consumption). Annex 3 provides more detail. 

7.4.3  ENVIRONMENTAL IMPACTS 

No direct environmental impacts and no significant harm, either direct or indirect, are expected to 
arise from the implementation of the preferred option. This initiative would be expected to produce 
indirect  positive  impacts  on  several  environmental  factors  such  as  climate,  use  of  resources, 
biodiversity,  sustainable  production  and  consumption,  etc.  This  initiative  is  expected  to  increase 
confidence in ESG ratings and improve market functioning, which could lead to greater use of ESG 
ratings. Through more transparency on methodologies, competitive pressure is expected over time to 
make ESG ratings more relevant in capturing factors that mostly drive environmental performance 
of  companies.  As  investors  increasingly  value  and  trust  ESG  ratings,  companies  will  be  also 
incentivised to improve both their sustainability transparency and performance. 

7.4.4  SOCIAL IMPACTS 

As regards social impacts, similarly to indirect environmental impacts outlined above, this initiative 
would  be  expected  to  have  indirect  positive  social  impacts  on  working  conditions,  employment, 
health and safety. Additionally, the initiative should have a positive impact on governance and civic 
participation. Civil society organisations could use ESG ratings and would also benefit from greater 
transparency on the products and providers, as well as greater confidence in the ratings. 

52 

 
7.4.5  IMPACT ON FUNDAMENTAL RIGHTS 

The preferred options respect the rights and principles set out in the Charter of Fundamental Rights 
of the European Union, in particular those in Article 16 (freedom to conduct a business). The free 
movement of persons, services and establishment constituting one of the basic rights and freedoms 
protected by the Treaty on the European Union and the Treaty on the Functioning of the European 
Union is relevant for this measure. 

7.5  APPLICATION OF THE ‘ONE IN, ONE OUT’ APPROACH AND REFIT 

A large part of the costs arising from this initiative can be categorised as administrative costs relevant 
for the “one in, one out” offsetting. Total recurring administrative costs subject to one in, one out 
offsetting are estimated in the approximate magnitude of EUR 7.5-12.3 million. Meanwhile, total 
one-off administrative costs subject to one in, one out offsetting are estimated in the approximate 
magnitude of EUR 4.5 – 7.3 million. 

These include the following: 

1.  Costs of disclosures on methodologies and operations of ESG rating providers: collecting and 
disclosing data is expected to give rise to costs in the range of EUR 440 - 880 thousand one-
off and EUR 770 thousand to 1.7 million on a recurring basis148. 

2.  Costs  of  authorisation:  approximately  EUR  4  –  6.4  million  one-off  cost  for  preparing  the 

required documents. 

3.  Costs of complying with supervisors’ requests: approximate total magnitude of EUR 6.7 – 
10.6 million per year on a recurring basis. This cost item is expected to be proportionate based 
on provider size (as confirmed both by ESMA and interviews with providers). 

Further  detail  is  available  in  Annex  3.  There  are  no  administrative  cost  savings,  as  it  is  a  new 
legislation not amending previous EU rules. For the same reason, this is also not a REFIT initiative. 

8.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? 

The Commission will ensure that the actions selected in this IA contribute to the achievement of the 
policy  objectives  with  a  blend  of  specific  monitoring  elements  designed  to  measure  efficiency  in 
implementation  and  progress  towards  specific  objectives,  but  also,  other  monitoring  tools 
contributing  to  the  general  objectives.  Those  elements  and  tools  are  further  described  below.  To 
monitor progress towards meeting the specific objectives, the Commission services will explore the 
possibility of organising periodic surveys of investors, companies but also of ESG rating providers. 

ESMA, that under this initiative would be acting as supervisor of ESG rating providers, would be the 
legitimate actor to organise the surveys and take stock of the developments and highlight potential 
issues of concerns, also liaising with relevant national authorities in the Member State where ESG 
ratings are used and where ESG rating providers are located and have their operations. 

The  surveys  would  gather  data  on  (1)  users’  and  rated  entities’  perceptions  of  the  evolution  of 
information available, in particular with respect to the specific objectives identified in section 4 and 
whether those objectives are being met, and (2) the costs and benefits of ESG rating regulation and 

148 For the first year, it is safer to assume that these costs have to be added together (ongoing + one-off element). 

53 

 
                                                 
oversight  from  an  ESG  rating  providers  perspective.  Such  surveys  will  be  dependent  on  the 
availability of financial resources. 

Progress towards meeting the specific objectives can also be monitored through analyses of: 
- 
- 
- 
- 
- 

the number of ESG rating providers providing services in the EU; 
the number of ESG ratings made available; 
the growth in use of ESG ratings by users and issuers; 
the number of ESG ratings having financial risks and/or impact objectives; 
information  made  available  to  the  public,  online,  by  ESG  rating  providers,  in  particular 
development of eventual booklets/information papers; 
the extent to which ESG ratings/scores that measure the same constructs vary between different 
rating agencies, and in particular whether divergence declines over time; 
-  whether correlation of ESG ratings with similar objectives has increased; 
- 
amount of ESG investment based on ESG ratings; 
-  market share of ESG investment based on ESG ratings; 
- 
-  Whether ESG ratings continue to suffer from biases (size, location, industry). 

the number of scandals linked to ESG ratings; 

- 

Monitoring  progress  towards  meeting  the  general  objectives  is  by  definition  considerably  more 
complex, since it is methodologically difficult to distinguish the impacts of the proposed intervention 
on  ESG  ratings  from  other  possible  causes.  Nevertheless,  the  Commission  services  propose  to 
monitor progress regarding the general objectives by: 

-  Monitoring  trends  in  investments  in  companies  that  carry  out  sustainable  economic 

activities;149  

-  Engaging  with  supervisors  and  other  relevant  stakeholders  to  assess  whether  concerns  of 

greenwashing involving ESG ratings are being reduced. 

It may also be possible to use the proposed surveys of investors, companies and ESG rating providers 
to  gather  evidence  about  whether  stakeholders  perceive  that  ESG  rating  providers  are  more 
accountable for their activities. 

In  addition,  different  stakeholders,  including  civil  society  organisations,  rating  agencies,  business 
organisations and public authorities are likely to publish reports that monitor developments in this 
area, which will be a useful complement to the monitoring carried out by the Commission services. 

The  indicators  above  and  surveys  will  help  evaluating  whether  the  preferred  policy  option  is 
successful  in  achieving  the  specific  objectives.  These  indicators  will  then  serve  as  a  basis  for  an 
evaluation that should be presented at the latest five years after the entry into force of the present 
initiative. The draft proposal will further contain a commitment to evaluate the impacts of the new 
legislative  act.  The  Commission  will  start  monitoring  the  implementation  of  the  preferred  policy 
option after the entry into force of the initiative. 

149 This will be done in close cooperation with the Platform on Sustainable Finance, which will monitor trends regarding 
capital flows towards sustainable investments as set out in Article 20 of the Taxonomy Regulation. 

54 

 
 
 
                                                 
ANNEX 1: PROCEDURAL INFORMATION  

  Lead DG, Decide Planning/CWP references 

This Impact Assessment Report was prepared by Directorate C "Financial Markets" of the Directorate 
General "Directorate-General for Financial Stability, Financial Services and Capital Markets Union" 
(DG  FISMA).  The  Decide  Planning  reference  of 
is 
PLAN/2021/12801.  This  initiative  is  part  of  the  Commission’s  renewed  sustainable  finance 
strategy adopted in July 2021150.  

the  "Initiative  on  ESG  Ratings" 

  Organisation and timing 

Several  services  of  the  Commission  with  an  interest  in  the  initiative  have  been  involved  in  the 
development  of  this  analysis.  Four  Inter-Service  Steering  Group  (ISSG)  meetings,  consisting  of 
representatives from various Directorates-General of the Commission, were held in 2022.  

The  first  meeting  took  place  on  31  January  2022,  attended  by  representatives  from  CLIMA, 
CONECT,  COMP,  ECFIN,  EMPL,  ENER,  ENV,  ESTAT,  GROW,  INTPA,  JRC, JUST,  MOVE, 
REGIO, TRADE, LS and the Secretariat General (SG).  

The second meeting was held on 19 September 2022. Representatives from CLIMA, COMP, DEFIS 
EMPL, GROW, ENV, INTPA, JRC, JUST, TRADE, MARE, and the Secretariat General (SG) were 
present.  

The third meeting was held on 17 October 2022 and was attended by ECFIN, CLIMA, EMPL, GRO, 
INTPA, JRC, BUDG, JUST, TRADE, CNECT, REFORM and the SG. 

The fourth meeting was held on 10 November 2022 and was attended by ECFIN, CLIMA, COMP, 
ENV, REFORM, TRADE, ESTAT, RTD, SJ and the SG. 

This was the last meeting of the ISSG before the submission to the Regulatory Scrutiny Board on 16 
November 2022. The meetings were chaired by SG. 

DG FISMA has considered the comments made by DGs in the final version of the IA. In particular, 
it has added a significant number of sources in the problem definition section to demonstrate market 
failures, further detailed disclosure requirements to which ESG rating providers would be subject to, 
clarified  the  scope  of  the  initiative  and  the  proportionality  principle  and  application  of  the 
requirements  towards  smaller  ESG  rating  providers.  DG  FISMA  also  integrated  some  additional 
considerations  over  the  integration  of  ESG  factors  in  credit  ratings  worthiness  asessment.  The 
discussion  on  possible  options,  analysis  of  impacts  and  the  preferred  option  takes  account  of  the 
views and input of different DGs. 

  Consultation of the Regulatory Scrutiny Board 

The  Impact  Assessment  report was  examined by  the Regulatory Scrutiny  Board on 14  December 
2022. The Board gave a Positive Opinion with reservations. 

  Evidence, sources and quality 

150 Renewed sustainable finance strategy 

55 

 
                                                 
The impact assessment draws on a combination of desk research, external studies, studies carried out 
on behalf of the Commission, meetings with stakeholders, a targeted public consultation, academic 
research papers and other. The material used has been gathered since the First Sustainable Finance 
Action Plan in May 2018. This material includes but is not limited to the following:  

1.  A study commissioned by DG FISMA, “Study on Sustainability Related Ratings, Data and 
Research” (consortium led by SustainAbility Institute, ERM) provides information about the 
trends and business models in the market for sustainability rating agencies and data providers, 
and  issues  in  the  market  such  as  lack  of  transparency,  biases,  lack  of  engagement  with 
companies, etc.151  

2.  External studies: “Environmental, Social and Governance (ESG) Ratings and Data Products 
Providers”,  IOSCO,  November  2021152;  “ESG  Investing  and  Climate  Transition”,  OECD, 
October 2021153, etc. 

3.  A Call for Evidence on Market Characteristics of ESG Rating and Data Providers in the EU 
conducted by ESMA. The call for evidence was published on 3 February 2022 with a deadline 
of 11 March 2022. The purpose was to develop a picture of the size, structure, resourcing, 
revenues and product offerings of the different ESG rating providers operating in the EU. The 
call was mainly addressed to three target groups: ESG rating providers; users of ESG ratings; 
and  entities  subject  to  rating  assessment  of  ESG  rating  providers.  ESMA  published  its 
findings in a letter to the Commission on 27 June 2022.154 

4.  A call for evidence and an online targeted consultation conducted by DG FISMA. The call 
for evidence and consultation document were published on 4 April 2022 and the deadline for 
responses was 10 June 2022. A total 168 organisations and persons responded to the targeted 
consultation.  Individual  companies  were  the  biggest  single  group  of  respondents  (59%), 
followed  by  business  associations  (23%)  and  non-governmental  organisations  (9%).  The 
remainder represented public authorities, academic and research institutions, trade unions and 
citizens. The consultation consisted of over 200 questions divided into 2 main sections; the 
ESG ratings section covered the use of ESG ratings, current dynamics and functioning of the 
market,  and  the  need  for  and  potential  costs  of  EU  intervention;  the  credit  ratings  section 
covered the extent of incorporation of ESG factors in credit ratings, the disclosures on ESG 
factors in credit ratings, and the need for and potential costs of EU intervention. A Feedback 
Statement  providing  an  overview  of  the  contributions  to  this  public  consultation  was 
published on the Commission’s website on 3 August 2022. No campaigns or similar action 
with major impact on statistical results on the targeted consultation have been identified.  
5.  Bilateral  meetings  with  various  stakeholders  between  April  and  October  2022,  including 
meetings  with  14  different  ESG  rating  providers,  Meetings  with  users  or  associations 
representing, among others, rating users, meetings with other stakeholders such as academics, 
NGOs, public bodies and supervisory authorities. 

We also analysed existing international recommendations and codes for ESG rating providers, such 
as  the  IOSCO  recommendations.  168  organisations  and  persons  responded  to  the  targeted 
consultation supporting this initiative, mainly investors, ESG rating providers and listed companies. 

The material used to inform this impact assessment comes from the market participants as well as 
other reputable and well-recognised sources such as academic studies. Findings were cross-checked 

151 Study on Sustainability Related Ratings, Data and Research. 
152 IOSCO - Environmental, Social and Governance (ESG) Ratings and Data Products Providers. 
153 ESG Investing and Climate Transition, OECD . 
154 ESMA Call for Evidence on Market Characteristics of ESG Rating and Data Providers . 

56 

 
                                                 
across  the  different  information  sources  to  avoid  biases  caused  by  outliers  or  vested  interests  by 
authors. 

  Glossary of companies’names mentioned in this Impact Assessment 

Term or acronym 

Meaning or definition 

As you Sow 

As you Sow, a non-profit organization, www.asyousow.org. 

Bloomerg 

Bloomberg LP, www.bloomberg.com. 

CAER 

Now ISS ESG Australia, www.issgovernance.com  

Carbon4 Finance 

Carbon4 Finance SAS, www.carbon4finance.com  

CDP 

Ecodes 

CDP Worldwide, a non-profit organization, www.cdp.net  

Fundacion Ecologia y Desarrollo, www.ecodes.org  

EcoVadis 

Ecovadis SAS, www.ecovadis.com  

Ecovalores 

Ecovalores, www.ecovalores.org  

Environmental Finance 

Environmental-Finance.com, published by Field Gibson Media 
Ltd, www.environmental-finance.com  

FactSet 

FactSet Research Systems Inc., www.factset.com  

FTSE Russell 

FTSE International Ltd., www.ftserussell.com  

GES 

GES International, now acquired by Sustainalytics 

Greeneye 

Greeneye, www.greeneye.co.il  

Impak Finance 

Impak Finance Inc., www.impakanalytics.com  

Imug 

Inrate 

ISS 

Imug rating GmbH, www.imug-rating.de  

Inrate AG, www.inrate.com  

Institutional Shareholder Services Inc., www.issgovernance.com  

57 

 
KOCSR 

Korea CSR Research Services 

Oekom research 

Oekom Research AG, www.oekom.de  

Moody’s 

Moody's Investors Service, Inc., www.moodys.com  

Morningstar 

Morningstar, Inc., www.morningstar.com  

MSCI 

MSCI Inc., www.msci.com  

Ninety One 

Ninety One UK Limited, www.ninetyone.com  

Refinitif 

RepRisk 

Refinitiv Limited and Refinitiv US LLC, www.refinitiv.com  

RepRisk AG, www.reprisk.com  

Russell Investments 

Russell Investments Group, LLC., www.russellinvestments.com  

ShareAction 

Fairshare  Educational  Foundation  (trading  as  ShareAction), 
www.shareaction.org  

Solactive 

Solactive AG, www.solactive.com  

Sustainable Value Investors 

Sustainable Value Investors,         
www.sustainablevalueinvestors.com  

Sustainalytics 

Sustainalytics, 
a 
www.sustainalytics.com  

Morningstar 

company, 

Sustainometric 

Sustainometric, www.sustainometric.com  

S&P 

Trucost 

Standard & Poor's Financial Services LLC, www.spglobal.com  

S&P Global Trucost, www.spglobal.com/esg/trucost  

Vigeo Eiris 

Now integrated by Moody’s ESG Solutions France SAS 

58 

 
  
 
 
ANNEX 2: STAKEHOLDER CONSULTATION (SYNOPSIS REPORT)  

1. 

Introduction  

At  an  early  stage,  the  preparation  of  this  initiative  was  informed  by  a  stakeholder  consultation 
supporting the Renewed Sustainable Finance Strategy. The overall feedback from the Consultation 
on the Renewed Sustainable Finance Strategy showed a strong support for EU action on ESG ratings. 
The main challenges to be addressed, according to the stakeholders, include a lack of standardisation 
of  ESG  reporting,  data  and  metrics,  and  a  lack  of  transparency  by  ESG  data  providers  regarding 
methodologies and aggregated underlying data used in their analysis. Concerns were also raised about 
potential conflicts of interest.155 

Following  on  from  the  Renewed  Sustainable  Finance  Strategy,  the  Commission’s  consultation 
strategy aimed to collect evidence and stakeholder views relating to the ESG ratings market. The 
main topics covered by this strategy were the usage of ESG ratings and dynamics of the market, the 
functioning  of the market  (and the nature  and  extent  of  existing problems), stakeholder views on 
potential  intervention  to  remedy  such  problems,  and  potential  costs  of  intervention  for  various 
stakeholders.  More  detailed  information  is  provided  below  on  the  stakeholder  groups  that  were 
consulted, the various consultation activities, and the results thereof. 

2.  Stakeholder groups 

The main stakeholder groups concerned by this initiative are the following: 

1.  Users of ESG ratings, who can be further subdivided into:  

o  Investors, who often use ESG ratings as part of their investment process, for instance 

for pre-selection of investments, or for weighting in a portfolio, etc. 

o  Non-investor  companies,  such  as  companies  who  want  to  assess  the  risks  in  their 
supply chains, or who want to assess and improve their own ESG performance. Note 
that in the latter case, this group overlaps to a certain extent with another stakeholder 
group, ‘Rated entities’. 

o  Other, e.g., civil society, public sector entities, academics, etc. who use ESG ratings 

for their research or other aims like tracking trends, calling for accountability. 

2.  ESG rating providers,  
3.  Rated entities, who have one or more solicited or unsolicited ESG ratings. 

All of the above stakeholder groups were consulted in the preparation of this impact assessment. 

3.  Consultation activities and other sources 

The following consultation activities were carried out to support this impact assessment.  

1.  A study commissioned by DG FISMA, “Study on Sustainability Related Ratings, Data and 
Research”  (‘the  Study’),  in  order  to  understand  the  state  of  the  play  of  the  sustainability-
related products and services market. It established an inventory and classification of market 
actors, sustainability products and services available in the market and analysed the use and 
perceived  quality  of  sustainability-related  products  and  services  by  market  participants.  A 

155 Consultation on a renewed sustainable finance strategy - summary of responses (europa.eu). 

59 

 
 
                                                 
consortium led by SustainAbility Institute, ERM, combined desk research with stakeholder 
engagement; they engaged with senior-level of the major sustainability-related product and 
service  providers,  asset  managers,  asset  owners  and  other  industry  participants  across  14 
Member  States.  Market  participants  were  invited  to  contribute  to  the  study  via  structured 
interviews and through an online survey launched in April 2020. In total, 236 respondents 
provided input,156 of which 198 through the survey and 38 through in-depth interviews. All 
the  respondents  were  from  market  participants  active  in  Member  States  and  125  of  the 
respondents were domiciled in a Member State. All relevant stakeholder groups were covered 
by the Study.157  

2.  A call for evidence and an online targeted consultation conducted by DG FISMA, in order to 
confirm the findings of the Study, and get detailed feedback on the issues in the market as 
well  as  understand  the  expectations  from  regulatory  responses.  The  call  for  evidence  and 
consultation document were published on 4 April 2022 and the deadline for responses was 10 
June  2022.  A  total  168  organisations  and  persons  responded  to  the  targeted  consultation. 
Individual  companies  were  the  biggest  single  group  of  respondents  (59%),  followed  by 
business  associations  (23%)  and  non-governmental  organisations  (9%).  The  remainder 
represented public authorities, academic and research institutions, trade unions and citizens. 
Regarding the respondents’ role in the ESG rating / credit rating market, 28.6% respondents 
play a role as ESG rating users (investors), 42.3% as ESG rating users (non- investors), 19.6% 
as ESG rating users (others), 29.2% as rated companies, 12,5% as ESG rating providers, 5.4% 
as  CRAs,  18.4%  as  credit  rating  users,  3%  as  auditors,  2.4%  as  supervisors  and  39%  as 
other.158  A  Feedback  Statement  providing  an  overview  of  the  contributions  to  this  public 
consultation was published on the Commission’s website on 3 August 2022. No campaigns 
or similar action with  major impact  on statistical  results on the targeted  consultation have 
been identified.  

3.  Targeted  informal  outreach  in  the  form  of  bilateral  meetings  with  various  stakeholders 
between April and October 2022, in order to get in-depth feedback on issues in the market 
and the consequences of potential intervention. This outreach included: 

o  Meetings  with  14  different  ESG  rating  providers.  This  targeted  outreach  focused 
notably on costs and their proportionality, and a balance sample of small and large 
providers  was  targeted.  Some  of  the  stakeholders  provided  a  confidential  written 
follow-up based on an interview guide shared prior to the calls, which was used in the 
assessment of costs (as described in Annex 3); 

o  Meetings with users or associations representing, among others, users of ESG ratings. 

Directly and indirectly, over 20 asset managers have contributed; 

o  Meetings  with  other  stakeholders  such  as  academics,  NGOs,  public  bodies  and 

supervisory authorities.   

The results of the various activities outlined above are described in the next section, under the relevant 
stakeholder groups. 

4.  Results of stakeholder consultations 

Summary of call for evidence 

156  Types  of  market  participants:  50  asset  managers,  4  NGOs,  11  asset  owners,  5  benchmark  administrators,  9  data 
providers, 5 grant funded research providers, 10 CRAs, 24 ESG rating providers, 8 sell-side brokers, 45 experts and 65 
companies. 
157 Study on sustainability-related ratings, data and research.  
158 As means of clarification, respondents could choose more than one stakeholder group.  

60 

 
                                                 
25 responses were received to the call for evidence which summarized the context, the Commission’s 
initial  understanding  of  the  problems  in  the  market,  and  the  possible  courses  of  action.  12  of  the 
responses were from individual EU citizens, while the remainder were from companies and business 
associations (11) and NGOs and foundations (3). Several responses were found to be irrelevant or 
uninformative with respect to the issues at hand and are thus not considered further in this impact 
assessment.  

Among the informative contributions, most were in favour of potential action at the EU level and 
highlighted some points that were echoed in the consultation results presented below. Briefly, these 
were: (i) the importance of comparable and reliable ESG data being used for ESG ratings and the 
expected  improvement  following  the  CSRD’s  entry  into  force;  (ii)  the  need  for  transparency  of 
objectives, methodologies and data used by ESG rating providers; (iii) the need to avoid potential 
conflicts of interest at the level of ESG rating providers. Respondents also commented on a number 
of other aspects they considered problematic, such as the (lack of) dialogue between rated entities 
and the raters, the (insufficient) accounting for regional or other specificities of rated entities and the 
(lack of) appropriate materiality thresholds in assessments of specific ESG aspects. All contributions 
were taken into account in this impact assessment. 

Analysis of consultation results by stakeholder group 

The Study surveyed asset managers, asset owners, benchmark administrators and rated companies. 
Views of each stakeholder group were sometimes presented individually in the Study, and sometimes 
in  aggregate.  The Consultation took  a similar but  slightly more  granular approach, separating the 
investor users, non-investor users, rated entities, providers and others. Stakeholder feedback collected 
via  these  two  and  other  activities  are  presented  below  under  the  relevant  heading  based  on  the 
grouping of the Consultation. The Consultation results are not per se representative of the market, 
however this Impact Assessment is based on a large number of different sources, indicated in Annex 
I. 

Views of ESG rating users (investors) 

Dynamics of and problems in the market 

The  Study  concluded  that  asset  managers  use  sustainability-related  data  all  across  the  investment 
decision  process,  including  for  portfolio  selection,  index  construction,  risk  management,  voting 
practices, and engagement with companies. In the survey conducted for the Study, and in the IRRI 
Survey 2019159, asset managers reported that they multi-source sustainability-related products and 
services from on average 2 rating and data providers. The Russell Investment 2020 survey160 also 
confirmed this and added that increasingly asset managers combine external services with in-house 
views.  

Asset  owners  surveyed  for  the  Study  also  valued  ESG  ratings  highly,  although  there  was  a  wide 
variance  in  usage  of  these  and  other  sustainability-related  services  (including  the  approach  to  in-
house versus external) by asset owners of different sizes and types.  

In the survey conducted for the Study, 75% of asset managers anticipated an increased demand for 
both in-house sustainability-related research capacity, and external sustainability-related data, rating 
and  research  products  and  services,  at  broadly  equivalent  levels.  In  the  Study,  rating  users  who 

159 IRRI Survey 2019. 
160 Russell Investment 2020 Survey. 

61 

 
                                                 
identified as investors or benchmark administrators highlighted, among others, the need for greater 
transparency and focus on sector-specific material issues. Specifically, they noted that there is a lack 
transparency of the methodologies deployed and lack of understanding as to what the rating or data 
represents. In addition, investors called for data standardisation (lack of which can lead to bias against 
smaller companies), data quality and greater comparability among ratings.  

In the Consultation, the conclusions of the Study were largely confirmed. First, all investor users who 
expressed an opinion expect the market to continue to grow, although 85% do not think the market 
is functioning well today. They consider that the market suffers due to the lack of transparency of 
providers’ operations, lack of explanation of what ratings measure, lack of common definitions and 
use of different terms for the same products, lack of comparability and reliability of ratings, and lack 
of supervision over the functioning of the market. Responding investors are divided on the current 
quality of ESG ratings, with around a third each considering the quality in the poor range, neutral 
and in the good range. However, almost all consider it an issue that providers do not communicate 
and disclose relevant underlying information, and the majority consider it an issue that there is a lack 
of transparency on the methodology and objectives of ratings. Indeed, almost all investors consider 
that there are significant biases in the methodology used by providers. 

Respondents are more divided on whether providers using very different methodologies or having 
different objectives (i.e., assessing different sustainability aspects) constitutes a problem. However, 
74% of investors agree on the fact that the current level of correlation among ratings assessing the 
same sustainability aspects is not adequate.  

74% consider the market to be prone to potential conflicts of interest, with the main risk (among 
others) cited by almost all respondents being providers offering paid advisory services to companies 
they assess. 

Over half of investors consider the fees charged by providers are not proportionate to the services 
provided. Moreover, 70% consider that the information provided about fees is not transparent or clear 
enough, calling for more information to be made available on: notice periods for contract changes 
(including fees), additional charges for data re-use, fees of each aspect of a service (e.g., per dataset 
and  other  product).  A  few  go  on  to  suggest  that  cost-based  pricing  mechanisms  or  FRANDT 
principles  be  imposed  on  providers,  and  that  EU  authorities  collect  and  publish  information  on 
licensing practices of providers.  

Need for intervention 

A large majority of investors responding to the relevant question of the Consultation (69%) consider 
legislative intervention is needed to  address the problems outlined above, including a supervision 
regime.  Almost  all  responding  investors  (95%)  believe  there  should  be  minimum  disclosure 
requirements in relation to providers’ methodologies, but they are more divided on whether these 
should be via standard templates, with only a slight majority (52%) supporting the latter. Investors 
desire  transparency  on  methodological  items  (covering  both  high-level  and  the  individual  rating 
level) such as whether it reflects risks or impact (or another factor), the materiality assessment for 
each sector and rated company, which metrics have been selected as relevant, and what weight has 
been  attributed  to  each  of  these,  whether  AI  has  been  used  or  not,  the  integration  of  national  or 
company  specificities,  changes  to  rating  methodologies,  reasons  for  changes  to  ratings,  whether 
controversies  are  included  or  not,  whether  analysis  is  backward-looking  or  forward-looking,  etc. 
Investors made the point that disclosures on these aspects could be similar to those made by CRAs. 
Investors that are not in favour of standardised templates for disclosing information consider that it 
may be premature to introduce a mandatory, close-ended template for providers as it is a new market. 

62 

 
They also consider that a close-ended template would not fit given the diversity of rating products 
and that it would hinder innovation.  

From the data side, investors are interested in the sources of data (e.g., public or not, voluntary or 
mandatory  disclosures),  the  data  collection  processes,  how  missing  data  is  dealt  with  and  the 
methodology for estimation, the practice for updating data and revising historical data, data quality 
controls,  etc.  In  relation  to  governance,  internal  control  and  management  of  conflicts  of  interest, 
respondents  mention  that  providers  should  publicly  disclose  their  policies,  including  the  level  of 
engagement  with  rated  entities,  and  whether  ratings  are  solicited  or  not.  In  order  to  increase 
reliability, investors would, among other measures, like to have more information on the qualification 
of analysts, shortcomings of methodologies, etc. 

Two  thirds  support  the  same  regime  applying  to  all  providers,  regardless  of  size,  and  almost  all 
support the same regime applying to all providers who rate European companies, regardless of the 
provider’s  location  (e.g.,  extra-EU).  When  asked  what  kind  of  supervision  on  ESG  providers’ 
operations  would  be  appropriate,  many  investors  responded  that  it  could  be  made  similar  to  the 
supervision of CRAs, by ESMA.  

Views of ESG rating users (non-investors) 

Dynamics of and problems in the market 

The  relevant  views  of  non-investor  rating  users  on  problems  in  the  market  were  not  described 
separately in the Study; thus, they have already been summarized in the previous sub-section. In the 
Consultation, the views of non-investor users were also mostly aligned with those of investor users.  

First, almost all non-investor users who expressed an opinion expect the market to continue to grow, 
although 85% do not think the market is functioning well today. They consider that the market suffers 
from the same shortcomings as those identified by investor users, namely the lack of transparency of 
providers’ operations, lack of explanation of what ratings measure, lack of common definitions and 
use of different terms for the same products, lack of comparability and reliability of ratings, and lack 
of supervision over the functioning of the market. Responding non-investors are also divided on the 
current quality of ESG ratings, with around a third each considering the quality in the poor range, 
neutral  and  in  the  good  range.  However,  the  majority  consider  it  an  issue  that  providers  do  not 
communicate and disclose relevant underlying information, and that there is a lack of transparency 
on  the  methodology  and  objectives  of  ratings.  Indeed,  a  large  majority  consider  that  there  are 
significant biases in the methodology used by providers. 

For  non-investor  users,  the  use  of  different  methodologies  and  objectives  by  different  providers 
seems  to  be a bigger problem than it is  for investors. Further, 88% of non-investors consider the 
current level of correlation among ratings assessing the same sustainability aspects to be inadequate.  

86% consider the market to be prone to potential conflicts of interest, with the main risk (among 
others) cited by almost all respondents being providers offering paid advisory services to companies 
they assess. However, unlike investors, non-investor users are divided on whether or not  the fees 
charged by providers are proportionate to the services provided.  

The majority do consider, nevertheless, that the information provided about fees is not transparent 
and clear enough, calling for more information to be made available on: notice periods for contract 
changes (including fees), additional charges for data re-use, fees of each aspect of a service (e.g., per 
dataset and other product), criteria for setting fees.  

63 

 
Need for intervention 

A  large  majority  of  non-investors  responding  to  the  relevant  question  of  the  Consultation  (83%) 
consider  legislative  intervention  is  needed  to  address  the  problems  outlined  above,  including  a 
supervision regime. Almost all responding non-investors (95%) believe there should be minimum 
disclosure requirements in relation to providers’ methodologies, and differently from investor users, 
the majority of non-investor users (68%) support disclosures via standard templates. Non-investor 
users,  similarly  to  investors,  desire  transparency  on  methodological  items  (objective  of  rating, 
whether it is absolute or relative, key assumptions, metrics and weights) and data collection (sources, 
exchange with companies, estimation). In order to increase reliability, investors would, among other 
measures,  like  to  have  more  information  on  providers’  resourcing,  time  spent  per  company, 
shortcomings of methodologies, etc. 

As for investor users, 60% of non-investor users support the same regime applying to all providers, 
regardless  of  size,  and  all  support  the  same  regime  applying  to  all  providers  who  rate  European 
companies, regardless of the provider’s location (e.g., extra-EU). On the other hand, the remaining 
responding non-investors consider that a lighter regime for smaller providers is necessary to support 
opening up the market. Too strict rules for small players could result in market concentration of ESG 
rating, which may disadvantage issuers in terms of market power.  

Views of ESG-rated entities 

Dynamics of and problems in the market 

In the Study, rated entities reported frustrations that providers do not gather and process data and 
information in a timely, reliable or efficient manner; that providers’ methodologies are opaque and 
do not sufficiently take into account company context; that providers make errors (and are slow to 
correct them) and that engagement with multiple providers is time-consuming. The majority of rated 
entities said sustainability exposures and practices are only moderately reflected by providers, and 
overall were frustrated by a lack of transparency and comparability across providers.  

In the consultation, rated entities’ responses broadly confirmed the frustrations observed in the Study. 
They were also broadly aligned with users’ responses to the consultation, with the minor differences 
being mentioned in this section where relevant.  

First, like investors, almost all rated entities who expressed an opinion expect the market to continue 
to  grow, although 88%  do not  think the market  is  functioning  well  today. They  consider that  the 
market suffers due to the lack of reliability of ratings, lack of transparency of providers’ operations, 
lack of explanation of what ratings measure, lack of common definitions and use of different terms 
for the same products, and lack of supervision over the functioning of the market. On the current 
quality of ESG ratings,  half of responding rated entities consider it good or very good. However, 
almost all consider it an issue that providers do not communicate and disclose relevant underlying 
information,  and  the  majority  consider  it  an  issue  that  there  is  a  lack  of  transparency  on  the 
methodology  and  objectives  of  ratings.  Indeed,  almost  all  rated  entities  consider  that  there  are 
significant biases in the methodology used by providers. 

For rated  entities,  as  for non-investor users, the  use of different  methodologies  and objectives by 
different providers seems to be a bigger problem than it is for investors. Also, for rated entities, the 
current  level  of  correlation  among  ratings  assessing  the  same  sustainability  aspects  is  even  more 
problematic than for investors; 95% of rated entities consider it inadequate.  

64 

 
Similarly to investors, 78% of responding rated entities consider the market to be prone to potential 
conflicts of interest, with the main risk (among others) cited by almost all respondents arising where 
providers offering paid advisory services to companies they assess. Rated entities also consider it a 
risk when providers charge companies to see their own (rating) reports. However, unlike investors, 
rated entities are divided on whether or not the fees charged by providers are proportionate to the 
services provided.  

Need for intervention 

A  large  majority  of  rated  entities  responding  to  the  relevant  question  of  the  Consultation  (86%) 
consider  legislative  intervention  is  needed  to  address  the  problems  outlined  above,  including  a 
supervision  regime.  Almost  all responding rated  entities  (93%) believe there should be minimum 
disclosure requirements in relation to providers’ methodologies, and the majority (56%) believe these 
should  be  done  via  standard  templates.  In  terms  of  transparency,  rated  entities  want  similar 
disclosures as investors, but point out that if these are not made public, they need to be communicated 
at least to the rated entities themselves. Rated entities seem to expect more granular disclosures about 
methodology than investors do, and a few also call for standardized information requests from rating 
providers (to reduce the burden on rated entities)161, enhanced engagement with rating providers or 
even an obligatory right of recourse allowing rated entities to respond to providers’ rating decisions. 
Similarly to investors, ESG-rated entities that are not in favour of mandatory templates consider that 
the ESG rating market is still developing, and so it may be premature to have a standardised format 
for disclosing methodologies. They consider that ESG rating providers should indeed disclose their 
full methodologies, but enforcing a standardised approach could reduce innovation and narrow the 
range of insight available to users of ESG ratings. In relation to conflicts of interest, various rated 
entities call for Chinese walls, legal  entity separation or even prohibition against providers rating 
companies to whom they also offer advisory services.  

Just  over  half  of  the  responding  rated  entities  support  the  same  regime  applying  to  all  providers, 
regardless of size, while all support the same regime applying to all providers who rate European 
companies,  regardless  of  the  provider’s  location  (e.g.  extra-EU).  When  asked  what  kind  of 
supervision on ESG providers’ operations would be appropriate, many rated entities responded that 
a risk-based supervision by ESMA would be appropriate.  

Views of ESG rating providers 

Dynamics of and problems in the market 

The Study concluded that ESG rating providers agree with other stakeholders (in particular investors) 
about potential conflicts of interest, the need for clearer definitions and consistent use of terminology, 
and  the  need  for  greater  transparency  of  governance  and  methodologies.  In  addition,  ESG  rating 
providers complained that “companies do not publish sufficient reliable data to enable appropriate 
comparability and analysis, while at the same time asset managers demand increased breadth, depth, 
and quality of data.” 

161  Stephanie  Mooji,  “The  ESG  Rating  and  Ranking  Industry;  Vice  or  Virtue  in  the  Adoption  of  Responsible 
Investment?”,University of Oxford, 2017. Based on interviews with 20 companies in the Netherlands, Germany and the 
UK, companies receive approximately 30 requests a year on average from ESG rating and ranking providers. And for 
companies, addressing multiple individual requests for data and information on sustainability-related performance from 
stakeholders can be time intensive and costly. 

65 

 
                                                 
In the Consultation, ESG rating providers’ responses mostly confirmed the findings of the Study and 
were partially aligned with others’ responses; the main differences in views were on the extent of the 
existing  shortcomings  of  the  market.  Like  investors  and  rated  entities,  all  rating  providers  who 
expressed an opinion expect the market to continue to grow, although 71% do not think the market 
is functioning well today. However, only a slight majority consider that the market suffers from a 
lack of transparency of providers’ operations. ESG rating providers seem to be concerned most with 
the lack of clear explanation of what ratings measure, and lack of supervision/enforcement over the 
functioning of the market. On the current quality of ESG ratings, just over half of responding rating 
providers consider it good or very good. However, the majority consider it an issue that providers do 
not  communicate  and  disclose  relevant  underlying  information,  and  that  there  is  a  lack  of 
transparency on the methodology and objectives of ratings. Indeed, most providers consider that there 
are significant biases in the methodologies. 

Unlike other respondents, most ESG rating providers consider the level of correlation between ratings 
assessing the same sustainability aspects to be adequate.  

Similarly  to  other  respondents,  75%  or  responding  providers  consider  the  market  to  be  prone  to 
potential conflicts of interest, with the main risk (among others) cited by all respondents arising when 
providers offering paid advisory services to companies they assess. On the other hand and as may be 
expected, rating providers are mostly not  concerned by the fees charged in proportion to services 
offered. Need for intervention 

A majority of rating providers responding to the relevant question of the Consultation (62%) consider 
legislative  intervention  is  needed  to  address  the  problems  outlined  above,  but  (unlike  the  other 
respondents) they are divided on whether there should be a authorisation regime. Some ESG rating 
providers consider that authorisation would be appropriate to ensure the quality of their ESG ratings, 
whereas others consider that EU authorisation would be costly and could slow the development of 
the  market.  The  large  majority  of  responding  rating  providers  (88%)  believe  there  should  be 
minimum disclosure requirements in relation to providers’ methodologies, but, again unlike the other 
respondents,  50%  of rating providers believe these should  not be done via standard templates.  In 
terms of transparency, providers seem to generally agree on the need for methodology disclosures – 
at least to users, but one cautions that commercial secrets should not be made known to competitors 
as that would discourage innovation. Another provider calls for a differentiation between the regimes 
governing ratings and scores. In relation to conflicts of interest, rating providers were rather strongly 
in  support  of  various  measures,  from  disclosures  on  conflict-of-interest  prevention  to  mandatory 
separation of activities to even prohibition of the ‘issuer-pays’ business model.  

Unlike the other respondents, 39% of ESG rating providers responding to the relevant question in the 
Consultation (and unsurprisingly, many of the smaller providers) were in favour of a lighter regime 
tailored to smaller providers. The responding providers listed several barriers to entry for smaller 
providers,  such  as  the  initial  investment  needed,  difficulty  collecting  all  relevant  data,  the  large 
coverage  needed  to  be  competitive,  the  switching  costs  and  market  recognition/client  base  of 
incumbents, the difficulty to differentiate due to a lack of transparency in the market, and the fact 
that clients (investors) themselves are very cost-conscious due to their own decreasing margins.  

However, similarly to other respondents, providers do not support tailoring the regime based on the 
provider’s location (e.g. lighter regime for extra-EU providers). Also similarly to other respondents, 
providers gave the CRA regulation as an appropriate example of a supervision regime. 

Other views 

66 

 
We  also  examined  the  views  expressed  by  respondents  to  the  consultation  not  falling  into  the 
stakeholder  groups  above.  The  views  were  in  general  aligned  with  those  of  the  main  stakeholder 
groups, and as such are not repeated here.  

67 

 
 
 
ANNEX 3: WHO IS AFFECTED AND HOW?  

a)  Practical implications of the initiative 

The preferred option would primarily entail obligations for ESG rating providers to: 

(i)  notify ESMA and apply for authorisation to continue commercializing their ratings in the 

EU;  

(ii)  meet minimum organisational requirements for an authorisation (e.g. if the business does 
not already meet them, this requires putting in place relevant policies and procedures and 
ensure separation of business activities);  

(iii) publicly disclose key information about ESG rating characteristics and methodologies and 

provide additional granular disclosures to their clients and/or rated entities;  

(iv) provide information required by the supervisor during supervisory review.  

The preferred option also tasks ESMA with processing requests for authorisation and supervising the 
market.  

68 

 
 
 
 
 
 
 
 
b)  Summary of costs and benefits 

I. Overview of Benefits (total for all provisions) – Preferred Option 

Description 

Amount 

Direct benefits 

Comments 

Reduction  of  due  diligence 
costs  for  rating  users  and 
rated entities 

More  informed  choice  of 
ESG  rating  provider  and 
more  effective  engagement 
with ESG rating provider 

This  will  be  reflected  in  fewer  resources  needed  by  users  or  rated 
entities to get the same level of understanding of the ESG ratings in 
the market and their methodologies, as well as clarity on the sound 
operations of the ESG rating provider. It is challenging to estimate the 
size  of  this  impact,  but  we  can  consider  the  following  hypothetical 
example: assuming that each asset manager in the EU would save 0.5-
1.3 FTEs due to the additional transparency, it  would translate into 
cost  savings  of  approximately  EUR  110-290  million162.  The  total 
savings  would  likely  be  higher  considering  that  other  user  groups 
would also benefit. 

Not possible to quantify but can be partially covered by estimate in 
first row; part would be in addition.  

Who benefits: ESG rating users (investors, companies and other users), rated entities  

Users  and  rated  entities  will  have  an  improved  understanding  of  the  ESG  rating 
characteristics and their methodologies, and of the operations of ESG ratings providers.  

Who benefits: ESG rating users (investors, companies and other users), rated entities  

Differences  between  ESG  ratings  (objective,  factors/KPIs  considered,  weights,  etc.) 
become more explicit and users – or potential users - will be better able to compare rating 
products of different ESG rating providers, thus being able to make more informed choices 
of the products best suited for their purposes. Similarly, entities wishing to be rated can 
make more informed choices of rating provider. In terms of operations, users and rated 
entities can select the ESG rating providers with the business model and management of 
conflict of interest that they deem sufficient. Users and rated entities can also engage with 
ESG  rating  providers  more  effectively,  being  able  to  challenge  certain  methodological 

162 This example is based on the responses of more than 20 asset managers. While most of them only provided qualitative information and there were some outliers, most expected rather 
large savings from greater transparency on ESG rating methodologies. Indicative expected savings in FTEs from those who provided figures pointed at approximately 1.5-4 fewer FTEs  
being needed for due diligence on ESG ratings, reflecting the large resources decidated to this presently. In the hypothetical example, we conservatively work with just one third of this 
estimate to account for smaller or less ESG-focused asset managers who would likely have lower cost savings. We work with an approximate number of asset managers in the EU based 
on EFAMA and Statista figures. Note that these cost savings can’t be linked to EU legislation and are hence not considered to be relevant for “one in, one out” off-setting.  

69 

 
 
 
 
 
 
 
                                                 
Increase  in  quality  of  ESG 
ratings  

Not  possible  to  quantify  directly  but  see  final  row  for  size  of 
investment pool which could benefit. 

Who benefits: ESG rating users (investors, companies and other users), rated entities  

choices  as  needed.  Users  would  better  understand  the  limitations  of  ESG  ratings  and 
increased granularity of disclosures would allow them to prioritise additional analyst focus 
into  cases  where  they  consider  data  quality  to  be  low.  This  would  therefore  increase 
efficiency of their investment processes. 

Indirect benefits 

Higher fitness for purpose 

Not possible to quantify but see final row for size of investment pool 
which could benefit. 

Higher trust in ESG ratings   Not possible to quantify, but see final row for size of investment pool 

which could benefit. 

Quality of ESG ratings is expected to gradually increase as a result of greater oversight 
and transparency, as well as more effective engagement of users and rated entities with 
ESG rating providers. Market pressures would be expected to lead to a reduction in rating 
biases  and  in  risks  of  conflict  of  interest.  Further,  users  such  as  asset  managers  would 
make more efficient use of their external data budgets by selecting the right providers, and 
even in some cases using fewer providers than they otherwise do to ensure benchmarking 
for quality. The precise savings would depend on each user. 

Who benefits: ESG rating users (investors, companies and other users), rated entities 

ESG ratings are expected to gradually become more fit for purpose to enable investors and 
rated  companies  to  take  informed  decisions  as  regards  ESG-related  risks,  impacts  and 
opportunities. Users will also better understand the limitations of ESG ratings so they use 
them appropriately. A deeper understanding of the comparability and differences that lead 
to  lack  of  correlation  between  different  providers,  could  potentially  expose  the 
redundancies  in  using  multiple  providers,  or  conversely  justifying  the  use  of  different 
providers in different contexts. This in turn would help with efficiency in external data 
budgets of users. 

Who  benefits:  ESG  rating  users  (investors,    companies  and  other  users),  rated  entities, 
society at large 

Higher (perceived) quality, reliability and accuracy are expected to lead to higher trust in 
ESG ratings, which is also ultimately expected to fuel growth of the ESG ratings market. 
The  growth  in  the  market  could  also  lead  to  an  increase  in  coverage  of  rated  entities, 
including those who currently find it difficult or too costly to be rated. 163  

163 Note that in the first years of application, it is possible that we see a temporary decline in the market due to the effect of new rules (adaptation of providers, new costs, etc.).  

70 

 
 
 
 
 
 
 
                                                 
More 
economy 

sustainable 

EU 

According  to  EFAMA  statistics,  by  the  end  of  Q1  2021,  asset 
managers  in  Europe  applied  an  ESG  investment  approach  to  circa 
EUR 11 trillion of assets. An improvement in allocation of these EUR 
11 trillion could have a significant positive impact on ESG objectives. 

Who benefits: society at large  

The higher trust in ratings and their higher usefulness/fitness for purpose, could lead to 
better allocation of capital with regards to its contribution to ESG objectives or avoidance 
of ESG risks and more sustainable investment.  
Similarly, as investors increasingly value and trust ESG ratings, this would be expected to 
encourage  rated  entities  to  adopt  sustainable  practices.  Moreover,  with  the  greater 
transparency of rating methodologies, rated entities would be enabled to do so.  

n/a 

n/a 

n/a 

Administrative cost savings related to the ‘one in, one out’ approach* 

II. Overview of costs – Preferred option 

Users and rated companies 

ESG rating providers 

Supervisors 

One-off 

Recurrent 

One-off 

Recurrent 

One-off 

Recurrent 

Authorisati
on, 
principle-
based 
organisatio
nal 
requirement
s  and  risk-
based 
supervision 

Direct 
adjustment 
costs 

n/a 

n/a 

One-off  adjustment  costs  may  arise  e.g., 
due  to  the  need  to  upgrade  IT  systems  or 
strengthening  of  internal  procedures  and 
familiarisation  with  the  new  rules  (e.g., 
legal  and  consultancy  costs).  Data  that 
would  allow  to  provide  an  estimate  were 
very limited and the impact would greatly 
depend on the readiness and complexity of 
the provider.   

Recurring  adjustment  costs  may  arise,  e.g. 
running  a  strengthened  internal  control  and 
compliance  function  and  maintenance  of  IT 
systems. Data that would allow to provide an 
estimate  were  very  limited  and  the  impact 
would  greatly  depend  on  the  readiness  and 
complexity  /  governance  of  the  provider. 
Possible further cost related to changes to the 
business models, where ESG rating providers 
do not sufficiently separate business activities 
or do not have policies in place against conflict 
of  interest.  These  would  be  very  provider-
specific and we do not have sufficient data to 
estimate  the  size  of  impact  or  number  of 
providers impacted. 

n/a 

n/a 

71 

 
 
 
 
 
Direct 
administrativ
e costs 

n/a 

n/a 

Applying  for  authorisation:  preparing  and 
relevant  documents  would 
submitting 
imply  an  approximate  magnitude  of  costs 
of EUR 68 000 – 108 000 per provider and 
EUR 4 - 6.4 million in total.  

n/a 

n/a 

n/a 

Direct 
regulatory 
fees and 
charges 

Direct 
enforcement 
costs 

n/a 

n/a 

n/a 

n/a 

Costs  are  expected  to  arise  from  ongoing 
interaction  with supervisor and responding to 
their information requests and estimated at an 
approximate  total  magnitude  of  EUR  6.7  – 
10.6  million164.  Costs  of  interaction  with  the 
supervisor  are  expected  to  be  proportionate 
between  entities,  as  risk-based  supervision 
focuses more effort on larger players in a given 
market165. 
.  

Supervisory  fees  –  sliding  scale  ranging 
between  0.37%  of  revenues  for  smallest 
providers and 2.4% of revenues for the largest 
providers166.  

n/a 

n/a 

n/a 

n/a 

Costs for 
ESMA 
to  assess 
applicati
ons 
for 
authorisa
tion. 
(reflecte
d  in  the 

Ongoing 
of 
supervision 
rating 
ESG 
providers 
by 
ESMA will imply 
further 
resource 
needs.  The  total 
cost 
annual 
is 
increase 

164 This estimate is subject to relatively larger uncertainty as the Commission services have attempted to get estimates for these costs, but only few entities provided specific figures and 
the intensity of supervision (i.e. number of supervisory reviews in a certain number of years or how many additional documents would be asked for by the supervisor) is not yet fully 
clear. Some of the figures that have informed this estimate were derived by subtracting estimated cost of disclosure from the total  recurring compliance that some providers indicated 
rather than a self-standing figure for dealing with the supervisor.  
165 The effort level assumed in this estimate based on stakeholder responses greatly varies by size and corresponds to about 0.8-1.1 FTEs per smaller provider vs almost 4-7 FTEs for 
larger providers.  
166  Based on  a  preliminary  assessment  provided by  ESMA.  The  figures  are  subject  to  uncertainty  as  ESMA’s  estimation  only  considered  providers  where  revenue  information  was 
available. This estimate covers also the cost of enforcing disclosure rules and the cost for ESMA to grant authorisations to market participants, where the latter may be charged through a 
one-time authorisation fee.   

72 

 
                                                 
fee 

supervis
ory 
detailed 
above) 

at 

estimated 
approximately 
EUR  5.7  million 
annually167.  Such 
costs  would  be 
fully 
financed 
through 
fees 
supervisory 
by  ESG 
paid 
rating  providers 
(detailed 
under 
“Direct 
regulatory 
and charges”).  

fees 

Indirect costs 

n/a 

Possible 
pass-
through of fees and 
recurring 
other 
costs  to  users  of 
or 
ESG 
entities, 
rated 
depending 
on 
business model. 

ratings 

n/a  

n/a   

n/a 

n/a 

Minimum 
transparenc
y 
towards 
the  public 
and  more 

Direct 
adjustment 
costs 

n/a 

n/a 

Part of the potential upgrade of IT systems 
(see  above)  may  also  be  attributed  to 
disclosure  obligations.168  Providers  were 
not able to clearly separate  the two costs. 
Further  costs  would  stem  also  from  the 

Part  of  the  strengthening  of  the  compliance 
function  or  IT  maintenance  (see  above)  may 
also be attributed to disclosure obligations.169 
Providers were not able to clearly separate the 
two costs. 

n/a 

n/a 

167 This figure is a result of estimation by ESMA calibrated based on available data on the market, as the intensity of supervision and hence costs for the supervisor are expected to differ 
based on provider size, consistent with the risk-based supervision approach. The figure includes labour costs, overheads as well as relevant IT costs. As data on revenues from ESG ratings 
were available only for some providers, assumptions were used to extrapolate the estimate to the whole market in order to estimate total resource needs for ESMA and the corresponding 
supervisory fees to cover these costs.  
168 According to some of the interviewed ESG ratings providers. 
169 According to some of the interviewed ESG ratings providers. 

73 

 
                                                 
comprehens
ive 
disclosures 
to clients of 
ESG  rating 
providers 
and 
companies 

rated 

Direct 
administrativ
e costs 

n/a 

n/a 

need to become familiar with the new rules 
(e.g. legal and consultancy costs). 

One-off  cost  of  disclosing  information: 
collecting  relevant  data  and  describing 
characteristics and  methodologies of  ESG 
ratings  and  operations  of  ESG  rating 
providers.  If  relevant  policies/frameworks 
do not exist internally, these  may have  to 
be prepared from  scratch. Total estimated 
in the approximate range of EUR 7 500 – 
15  000  per  provider  and  EUR  440  -  880 
thousand in total170. 

Ongoing cost of disclosures: annual updates of 
information  on  ESG  rating  and  operations  of 
ESG  rating  providers  and  related  compliance 
checks. Estimated in the approximate range of 
EUR 13 000 – 29 000 per provider and  EUR 
770 thousand to 1.7 million in total.  

n/a 

n/a 

Direct 
regulatory 
fees and 
charges 

Direct 
enforcement 
costs 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

Additional 
resource needs for 
ESMA in order to 
enforce  the  rules 
disclosures. 
on 
There  would  be 
part 
the 
of 
estimate 
presented  above 
and  are  paid  for 
the 
by 
supervisory 
fees 
further 
detailed 

170 We note that the one-off costs as estimated from stakeholder feedback are lower than recurrding costs. Our assumption is that, if we wanted to obtain the total cost of preparing 
disclosures for the first time, we would need to add the one-off cost element to the recurring cost detailed in the next cell. 

74 

 
                                                 
Indirect costs 

n/a 

n/a  

pass-
Possible 
of 
through 
disclosure  costs  to 
ESG 
users 
of 
ratings  or 
rated 
entities,  depending 
on business model. 

n/a  

n/a 

n/a 

above 
table) 

in 

the 

Costs related to the ‘one in, one out’ approach 

Total   

Direct 
adjustment 
costs  

Indirect 
adjustment 
costs 

n/a 

n/a 

n/a 

n/a 

Possible 
pass-
through of costs by 
rating 
ESG 
providers  to  users 
of  ESG  ratings  or 
rated entities. 

Possible further costs related  to update  of 
IT systems or organisational changes.  

Adapting  business  models  to  comply  with 
rules  to  avoid  conflict  of  interest  and  other 
obligations. 

Possible  further  costs  related  to  strengthened 
internal  control  and  compliance  function  and 
maintenance of IT systems. 

n/a 

n/a 

Administrati
ve costs (for 
offsetting) 

one-off 

One-off cost in the approximate magnitude 
of EUR 4.5 – 7.3 million. These consist of 
the 
disclosures: 
approximate  total  of  EUR  440  -  880 
thousand  and  the  cost  of  applying  for 
authorisation: approximate total of EUR 4 
- 6.4 million. 

cost 

of 

in 

costs 

administrative 

On-going 
the 
approximate  magnitude  of  EUR  7.5-12.3 
million. These consist of the on-going cost of 
disclosures  (approximate  total  of  EUR  770 
thousand to 1.7 million) and costs of ongoing 
interaction with supervisor (approximate total 
of EUR 6.7-10.6 million).  

c)  Relevant Sustainable Development Goals 

III. Overview of relevant Sustainable Development Goals – Preferred Option 
Relevant SDG 

Expected progress towards the Goal 

Comments 

75 

 
 
 
 
 
 
 
 
 
 
SDG 12 – Responsible production and 
consumption 
Specifically,  item  12.6:  Encourage 
companies,  especially 
large  and 
to  adopt 
transnational  companies, 
sustainable  practices  and  to  integrate 
sustainability  information  into  their 
reporting cycle. 

This  initiative  would  be  expected  to  encourage  and  enable 
companies  to  adopt  sustainable  practices.  The  usage  of  ESG 
ratings is expected to increase, as noted in the evidence collected 
for  this  impact  assessment.  The  objective  of  this  initiative  is  to 
increase confidence in ESG ratings and improve the functioning of 
the market. This could lead to even more widespread use of ESG 
ratings.  As  investors  increasingly  value  and  trust  ESG  ratings, 
companies  will  also  be  incentivized  to  improve  both  their 
sustainability transparency and performance.  

The UN Indicator for this SDG is 12.6.1 Number of companies publishing 
sustainability reports. 
While  this  initiative  could  indirectly  lead  to  an  improvement  of  this 
indicator for the reasons mentioned, it would be very difficult to isolate its 
effect from the other regulatory initiatives (in the EU and across the globe) 
directly targeting sustainability reporting (such as the CSRD, discussed in 
Annex 4). Thus, an attempt to quantify this specific impact of this initiative 
is not considered feasible or proportionate. 

All SDGs (with possible exception of 
SDG  16,  as  it  is  unlikely  that  this 
initative  will  help 
improve 
institutions and access to justice ).  

to 

regards  ESG-related 

informed  decisions  as 

All  SDGs  are  expected  to  be  served  (indirectly)  through  the 
general  objective  of  this  initiative.    The  general  objective  is  to 
ensure that ESG ratings enable investors and rated companies to 
risks, 
take 
opportunities  and  impacts  and  foster  trust  and  confidence  in  the 
operations of ESG rating providers. Since ESG ratings are used by 
investors  for  the  allocation  of  funds  and  by  some  companies  to 
analyse their ESG performance and take corrective actions, this, in 
turn,  will contribute to reaching a  wider objective of meeting of 
European  Green  Deal  and  UN  Sustainable  Development  Goals. 
Some ESG ratings or scores also assess alignment with SDGs and 
greater  trust  and  transparency  on  these  ratings  could  encourage 
investment into progress on SDGs.    

All  SDGs  are  impacted  in  some  way  by  at  least  one  of  the  E,  S  and  G 
factors;  thus,  more  efficient  ESG  investment  would  be  expected  to 
contribute to progress in all areas. However, this contribution would likely 
only be incremental, and an attempt to quantify it is not considered feasible 
or proportionate.  

76 

 
 
 
 
 
Methodology for estimation of costs 

Cost  estimates  in  this  impact  assessment  were  obtained  through  the  targeted  consultation  and 
subsequent  interviews  with  ESG  rating  providers  and  subject  to  further  plausibility  checks  and 
assessment using contextual information collected in this process171.  

With  regards  to  the  costs  of  disclosures,  respondents  to  the  targeted  consultation  estimated  the 
number of hours of work that making such disclosures would require, both on one-off and recurring 
basis.  This  was  corrected  for  outliers  and  then  multiplied  with  data  on  non-wage  labour  costs172, 
including 25% overheads, based on Eurostat Structure of earnings survey and Labour Force Survey. 
Considering a rather large variation between the individual responses, a range was constructed around 
the estimate, reflecting uncertainty around some of the estimates and actual granularity of disclosures 
which will be specified further through delegated acts. The estimate from the consultation was further 
checked with ESG rating providers during subsequent interviews, which broadly supported the range, 
but highlighted dependency on the granularity173. The figures have been adjusted to reflect a business 
as usual  (BAU)  factor  of  30%, based on stakeholder replies from  the consultation and contextual 
information  which  pointed  at  higher  than  originally  considered  BAU.  However,  the  actual  BAU 
factor would vary between providers and their business lines, depending  notably on what internal 
procedures are already in place.  

The cost estimate for the more comprehensive disclosures is built on further extrapolation from the 
estimate  for  Option  1  based  on  the  qualitative  and  limited  quantitative  information  provided  in 
interviews  with  ESG  rating  providers  on  the  dependence  on  granularity  of  disclosures.  While 
evidence  was  more  limited,  providers  broadly  indicated  that  more  granular  disclosures  would  be 
approximately 2-3 times more expensive than more limited disclosures. It is safe to assume that there 
would be some overlaps in the data updates between the two sets of disclosures, which is reflected in 
multiplying the less granular estimate by two for the ongoing disclosures. 

Despite  similar  effort  for  collecting  cost  information,  both  through  a  targeted  consultation  and 
targeted  interviews,  responses  (especially  quantitative)  regarding  cost  of  applying  for  an 
authorisation and supervision were rather limited in the consultation and in the follow-up interviews. 
Moreover, figures varied significantly. For the cost of ongoing interaction with the supervisor, both 
information  from  ESMA  and  from  the  stakeholders  reflected  the  expectation  that  intensity  of 
supervision  would  be  proportionate  to  entity  size  and  hence  should  not  significantly  negatively 
impact  smaller  providers.  Since  most  stakeholders  who  provided  quantitative  information  on  this 
element  typically  referred  to  the  number  of  FTEs  (“Full  Time  Equivalent”)  in  a  compliance 
department, which is assumed to cover both work on disclosures and interaction with the supervisor, 

171 Such assessment had to deal with some conflicting information provided by stakeholders concerning e.g. the ratio of 
one-off and ongoing costs of disclosure. Some more detailed responses by stakeholders in follow-up to the interviews 
also revealed certain degree of double-counting. Responses may have been influenced also by complexity of governance 
of the providers, their product range or business model. 
172 We used those for labour category “professionals” as this seems to most closely reflect the nature of the work expected 
to arise from the initiative. The same source was also used for the other estimates, where hours of work or FTEs per year 
were used and monetised.   
173 There were several outliers at this stage as well, mostly among larger providers. In some instances, it was however 
not  clear  if  the  estimates  do  not  include  double  counting  between  cost  of  disclosure,  cost  of  ongoing  supervision  or 
broader adjustment costs. Where the figure provided corresponded rather to total labour cost increase in a typical year 
due to the intervention, it was used to derive approximate costs of dealing with a supervisor, where data were more limited 
(see below).    

77 

 
 
                                                 
the estimate for the latter was obtained by subtracting the cost of disclosures (as estimated above) 
from the cost of running a compliance department to address this attribution issue. No BAU factor 
was applied to the cost of interaction with the supervisor, as this cost is assumed to fully arise due to 
the new legislation.  

With  regards  to  costs  of  registration  vs.  authorisation,  a  limited  number  of  responses  had  to  be 
manually re-classified174 based on the contextual information from the interviews, which pointed at 
overall low cost of registration (some providers stating it would be negligible if not requiring setting 
up an entity in the EU and others pointing at costs of thousands or lower tens of thousands EUR). 
Estimates also varied between smaller providers, who had a tendency to estimate costs as lower, and 
larger players who expected higher costs of applying for an authorisation. A BAU factor of 20% is 
applied  to  gathering  information  and  providing  documents  required  for  an  authorisation  process, 
considering that a vast majority of such costs would be due to this new obligation but some of the 
documents (e.g. internal  policy documents)  would be in  place at  least  for  a  certain share of ESG 
rating providers. 

The size of expected resource needs for ESMA and corresponding supervisory fees for the sector that 
would cover these costs were estimated by ESMA and made more precise as a result of deliberations 
between ESMA and DG FISMA about the intensity of supervision and other key parameters.  The 
size of the budget and fees has been calibrated by ESMA based on the number and size distribution 
of ESG ratings providers. To derive the range of supervisory fees, ESMA used the information on 
revenues from the sale of ESG ratings, where these were available. Where not available, ESMA has 
extrapolated the number of entities in each size bucket proportionately (in the absence of information 
that would suggest a different distribution.     

174 This had to be done also since the consultation has not clearly distinguished between registration and authorisation, 
which has likely contributed to a greater disparity in the responses. Another reason was that a more detailed estimate for 
costs of registration received as follow-up to an interview revealed assumptions that rather matched the intended contents 
of Option 2 (authorisation and supervision).    

78 

 
 
 
                                                 
ANNEX 4: INTERACTIONS WITH OTHER SUSTAINABLE FINANCE LEGISLATION AND INITIATIVES 

In addition to the CSRD, SFDR and the EU taxonomy Regulation, this initiative also interacts with 
the work on Green Bonds Standards and EU climate benchmarks. 

Title 

Corporate Sustainability Reporting Directive (CSRD) 

Legislative  or 
non-
legislative?  

Brief 
description  of 
or 
policy 
legislation 

Legislative 

On  21  April  2021,  the  Commission  adopted  a  proposal  for  a  Corporate 
Sustainability Reporting Directive (CSRD), which would amend the existing 
reporting requirements of the Non-Financial Reporting Directive. 

The proposal 

A.  extends the scope to all large companies and all companies listed on 

regulated markets (except listed micro-enterprises) 
B.  requires the audit (assurance) of reported information 
C.  introduces more detailed reporting requirements, and a requirement to 
report according to mandatory EU sustainability reporting standards 
D.  requires companies to digitally ‘tag’ the reported information, so it is 
machine  readable  and  feeds  into  the  European  single  access  point 
envisaged in the capital markets union action plan 

The CSRD was agreed by co-legislators in June 2022 and should be published 
by the end of 2022 in the Official Journal. 

The CSRD envisages the adoption of EU sustainability reporting standards. 
The draft standards are to be developed by the European Financial Reporting 
Advisory  Group  (EFRAG).  The  standards  will  be  tailored  to  EU  policies, 
while building on and contributing to international standardisation initiatives. 

The first set of standards are to be adopted by June 2023. 

Interaction 
with 
ratings 

ESG 

The  main  element  from  the  CSRD  is  the  creation  of  mandatory  EU 
sustainability reporting standards. Standardising information to be disclosed 
by  large  companies  should  help  fill  gaps  in  data  availability,  improve  the 
quality but also reliability of corporate sustainability data. 

Since all ESG rating providers use some form of public data for their analysis, 
the standardisation of the latter should have a positive impact on the overall 
quality  and  reliability  of  ESG  ratings,  which  cannot  be  reliable  if  the 
underlying  data  is  of  poor  quality  or  is  unavailable.  ESG  rating  providers, 
given the availability of more and better data may also be less prone to using 
other  sources  of  data  that  are  difficult  to  compare  and  are  by  nature  less 
reliable. 

The  impact  on  correlation  amongst  ratings  is  however  harder  to  predict. 
According  to  a  research  paper  published  in  2021,  “greater  ESG  disclosure 

79 

 
actually  leads  to  greater  ESG  rating  disagreement”.175  In  particular,  ESG 
rating providers appear to disagree most on how to assess ‘outcome metrics’ 
disclosed by  firms.  As such, it is  possible that with  the advent  of reporting 
required by the CSRD, divergence in ESG ratings increases at first. However, 
as the authors themselves note, this dynamic may be related to the early phase 
of  ESG  disclosures,  when  there  is  little  consensus  among  analysts  on  ESG 
performance  metrics  and  may  neutralize  or  even  change  signs  (i.e.  greater 
disclosure  leads  to  lower  divergence)  in  the  future.  In  any  case,  greater 
disclosure  reduces  the  issues  around  data  collection  and  divergence  of 
underlying data used by ESG rating providers. 

Lastly, given that more companies will be required to report under the CSRD 
than required by the NFRD, there may be more demand for ESG ratings on 
and by these companies that may want to have some external party look at new 
possible risks and opportunities. 

Title 

European Single Access Point (ESAP) 

Legislative  or 
non-
legislative?  

Brief 
description  of 
policy 
or 
legislation 

Legislative and non-legislative 

The  ESAP  will  provide  seamless,  EU  wide  (cross  border)  access  to 
information  published  in  relation  to  financial  services,  capital  markets  and 
sustainability published by entities or about entities operating in the financial 
sector. For this, the ESAP legislative package lays down the foundations of 
ESAP  by  organising  the  collection  of  information  by  collection  bodies, 
addressing metadata and IT formats, and mandating minimum requirements 
in terms of quality, functionalities, governance and monitoring.   

The Commission proposed to make ESMA responsible for the governance of 
ESAP. Where appropriate, ESMA would work in close cooperation with the 
European  Banking  Authority  (EBA)  and  the  European  Insurance  and 
Occupational  Pensions  Authority  (EIOPA),  consult  the  national  collection 
bodies (NCAs, OAMs) and the Securities and Markets Stakeholders Group. 

Interaction 
with 
financial 
reporting 

non-

The availability of data via ESAP, hence easier access by stakeholders, can 
also  serve  as  sources  of  information  /  input  data  for  ESG  rating  providers, 
reducing use of estimations but also contributing to better quality of ratings 
overall. 

Title 

Credit Rating Agencies Regulation (CRA) 

175  

Christensen, Serafeim and Sikochi. 2021, op.cit. 

80 

 
 
 
                                                 
Legislative  or 
non-
legislative?  

Brief 
description  of 
policy 
or 
legislation 

Interaction 
with 
ratings 

ESG 

Legislative and non-legislative 

The first set of rules, which entered into force at the end of 2009, established 
a  regulatory  framework  for  CRAs  and  introduced  a  regulatory  oversight 
regime, whereby CRAs had to be registered and were supervised by national 
competent authorities. In addition, CRAs were required to avoid conflicts of 
interest,  and  to  have  sound  rating  methodologies  and  transparent  rating 
activities.  

In  2011,  these  rules  were  amended  to  take  into  account  the  creation  of  the 
European Securities and Markets Authority (ESMA), which supervised CRAs 
registered in the EU. ESMA has become a direct supervisor of CRAs. 

A  further  amendment  was  made  in  2013  to  reinforce  the  rules  aimed  at 
enhancing market competition and addressing weaknesses related to sovereign 
debt credit.  

The  “level  1”  legislation  is  supplemeted  by  delegates  acts  and  ESMA 
Guidelines.  

Investors take into account a variety of factors for the assessment of financial 
risks: Value at risk (VaR), stress testing,  market risks, credit risks, liquidity 
risks,  interest  risk.  Credit  risk  is  an  important  component  of  the  financial 
assessment  as  it  replies  to  the  question  whether  the  company  or  project  is 
financially sound and what  the likelihood  is that the company will  meet its 
debt  obligations.  Some  professional  investors  carry  their  own  credit  risk 
assessment  but  many  rely  on  the  assessment  provided  by  the  specialised 
entites  called  Credit  Rating  Agencies.  The  CRAs  are  required  to  take  into 
account  all  factors  relevant  for  the  assesement  of  creditworthiness,  and  to 
explain the reason for changes of credit ratings by accompanying each change 
with the press release. Some changes of credit ratings can be caused by ESG 
factors. How CRAs take ESG factors into account is explained in Annex 8. 

Some CRAs have also entered the market of ESG ratings and started to offer 
ESG  ratings,  scores  or  valuations.  However,  due  to  the  regulatory 
requirements,  the  activities  of  credit  ratings  are  separated  from  other 
businesses.  

Title 

Sustainable Finance Disclosure Regulation (Regulation EU 2019/2088 on 
Sustainability-related disclosure in the financial services sector) (SFDR) 

Legislative  or 
non-
legislative?  

Brief 
description  of 

Legislative 

The SFDR was adopted by co-legislators in spring 2019 and was published on 
9  December  in  the  Official  Journal.  It  is  already  in  force  and  most  of  the 
provisions apply from 10 March 2021 and complement corporate disclosures 

81 

 
 
policy 
legislation 

or 

by creating a comprehensive reporting framework for financial products and 
financial  entities.  Compliance  with  sustainability-related  disclosures  is 
expected  to  have  considerable  behavioural  effects  on  financial  firms,  and 
indirectly  on  the  business  models  of  companies  that  are  being  invested  in. 
Different investment strategies may entail investments in economic activities 
with different levels of environmental performance. 

On  4  February  2021,  the  European  Insurance  and  Occupational  Pensions 
Authority, the European Securities and Markets Authority and the European 
Banking  Authority  (collectively  the  ESAs)  jointly  submitted  to  the 
Commission a first batch of seven draft regulatory technical standards (RTS) 
under Articles 2a(3), 4(6) and (7), 8(3), 9(5), 10(2) and 11(4) of the SFDR.  
On 22 October 2021, the ESAs jointly submitted to the Commission a second 
batch of six draft regulatory technical standards under Articles 8(4), 9(6) and 
11(5)  SFDR.  The  Commission  decided  to  bundle  all  13  draft  regulatory 
technical standards in a single delegated regulation. 

The SFDR together with its RTS that will apply from 1 January 2023 aim to 
trigger changes in investment decisions by financial market participants that 
produce financial products and end-investors that purchase them, and financial 
advisers  that  provide  investment  recommendations,  towards  more  ESG 
considerations by improving the quality of information from the point of view 
of ESG positive and negative impacts. The Regulation is expected to also have 
effects on business models of investee companies. 

The SFDR lays down rules for sustainability-related disclosures toward end-
investors,  for  both  outside-in  sustainability  risks  and  inside-out  adverse 
sustainability impacts. 

It does so in relation to:  

1. the  integration  of  sustainability  risks  by  financial  market  participants  and 

financial advisers in all investment processes,  

2. financial  products  that  pursue  the  objective  of  sustainable  investment  or 

have environmental or social characteristics, and 

3. adverse  impacts  on  sustainability  matters  at  entity  and  financial  products 
levels,  i.e.  that  or,  in  certain  circumstances,  whether  financial  market 
participants  and  financial  advisers  consider  negative  externalities  on 
environment and social justice of the investment decisions/advice and, if so, 
how this is reflected at the product level.  

In  terms  of  legal  framework,  the  SFDR  is  a  directly  applicable  Regulation 
which introduces additional disclosure requirements to the existing elements 
of  relevant  sectoral  legislations  (AIFMD,  UCITS,  Solvency  II,  IORP  II, 
national  pension  rules,  IDD  and  MiFID  II),  via  a  self-standing  text  (lex 
specialis)  providing  full  harmonization,  cross-sectoral  consistency  and 
regulatory neutrality as well as joint convergence by ESMA, EIOPA and EBA 
(ESAs).  Instead  of  amending  all  these  existing  sectoral  legislations  in  an 
identical way, the SFDR comes on “top” of existing rules in order to impose 
sustainability disclosure obligations in the same way. This way consistency 

82 

 
 
Interaction 
with 
ratings 

ESG 

and regulatory neutrality across all relevant institutional investors' sectors is 
ensured. 

In  addition,  COM  has  revised  Level  2  measures  through  Delegated  Acts 
(under  current  empowerments  in  UCITS,  AIFMD,  MiFID  II,  Solvency  II, 
IDD)  to  explicitly clarify how product manufacturers and financial advisers 
should integrate sustainability risks and consider principal adverse impact in 
the investment and advisory processes (that is in the areas of organizational 
requirements,  operating  conditions,  risk  management  and  target  market 
assessment) as part of their duties towards clients/customers/beneficiaries. 

On 30 September, the ESAs proposed amendments to the RTS in relation to 
the  information  that  should  be  provided  in  pre-contractual  documents,  on 
websites,  and  in  periodic  reports  about  the  exposure  of  financial  products 
referred to in Article 8(1) to (2a) of the SFDR and in Article 9(1) to (4a) of the 
SFDR to investments in fossil gas and nuclear energy activities. 

On 22 October 2021, the ESAs jointly submitted to the Commission draft RTS 
developed under Article 8(4) and 9(6) of the SFDR. The draft RTS specify 
information required in Articles 5 and 6 of the Taxonomy Regulation on “how 
and to what extent” financial products referred to in Articles 8 and 9 of the 
SFDR  invest,  or  are  invested,  in  environmentally  sustainable  economic 
activities within the meaning of the Taxonomy Regulation. Financial market 
participants that offer financial products referred to in Articles 8 and 9 of the 
SFDR must comply with the respective requirements set out in the SFRD and 
in Articles 5 and 6 of the Taxonomy Regulation. 

In  this  context,  financial  market  participants  and  financial  advisers  use  a 
number of different  sources of information  for their needs under the SFDR 
and to be able to meet their disclosure requirements. 

ESG ratings including data that is used to reach the final rating is used as an 
important element to fill data gaps and comply with the disclosure obligations. 
Where  investors  do  not  have  clarity  over  the  methodology  used  and  how  a 
specific  ESG  rating  was  achieved  they  may  risk  providing  inaccurate 
disclosures that give a misleading idea of the degree of sustainability of the 
financial product. 

In  addition,  certain  ESG  passive  funds  track  ESG  benchmarks  which  rely 
heavily on ESG ratings. In such case, where data is taken at face value, some 
misallocation of capital may also happen with risks of greenwashing. 

Title 

Taxonomy Regulation: Regulation (EU) 2020/852 on the establishment of 
investment,  and  amending 
a  framework  to  facilitate  sustainable 
Regulation (EU) 2019/2088. 

83 

 
 
Legislative  or 
non-
legislative?  

Brief 
description  of 
policy 
or 
legislation 

Legislative 

Regulation (EU) 2020/852, or Taxonomy Regulation (TR), establishes criteria 
for  determining  whether  an  economic  activity  qualifies  as  environmentally 
sustainable  in  the  EU.  The  TR  applies  to:  (i)  measures  adopted  by  Member 
States or by the Union that set out requirements for financial market participants 
or  issuers  in  respect  of  financial  products  or  corporate  bonds  that  are  made 
available as environmentally sustainable; (ii) financial market participants that 
make available financial products; and (iii) undertakings which are subject to 
the  obligation  to  publish  a  non-financial  statement  or  a  consolidated  non-
financial statement pursuant to Article 19a or Article 29a of the NFRD. 

The  TR  is  centred  around  six  environmental  objectives:  climate  change 
mitigation, climate change adaptation, sustainable use and protection of water 
and marine resources, transition to a circular economy, pollution prevention and 
control, and protection and restoration of biodiversity and ecosystems. 

In order to qualify for inclusion in the EU Taxonomy, economic activities will 
need  to:  (a)  substantially  contribute  to  at  least  one  of  the  six  environmental 
objectives,  by  complying  with  robust  and  science-based  technical  screening 
criteria; (b) do no significant harm to the remaining environmental objectives; 
and (c) respect minimum social safeguards. 

With respect  to  climate  change mitigation, the TR recognises three different 
types  of  environmentally  sustainable  economic  activities:  (i)  low-carbon, 
which  in  and  of  themselves  contribute  substantially  to  one  of  the  six 
environmental objectives; (ii) transitional, which are consistent with EU and 
international  environmental  goals  but  for  which  there  are  no  technologically 
and  economically  feasible  low-carbon  alternatives;  and  (iii)  enabling,  which 
enable other activities to make a substantial contribution to at least one of the 
environmental  objectives  and,  at  the  same  time,  are  environmentally 
sustainable themselves (according to three specific criteria). 

The technical screening criteria will be developed in two batches: a delegated 
act  on  the  two  climate-related  objectives  –  which  was  adopted  by  the 
Commission at the beginning of Q2 2021- and a delegated act on the remaining 
four environmental objectives which is still being developed (date of adoption 
unknown). An additional delegated act complementing the TR has also been 
adopted in July 2021. It specifies the application of the requirements to publish 
the information that undertakings under the scope of the NFRD would have to 
disclose  in  their  non-financial  statements  or  consolidated  non-financial 
statements. 

Interaction 
with 
ratings 

ESG 

Article 8 of the EU Taxonomy Regulation requires financial and non-financial 
undertakings  under  the  scope  of  the  CSRD  to  include  in  their  sustainability 
reporting  or  consolidated  sustainability  reporting  information  on  how  and  to 
what extent their activities are associated with economic activities that qualify 
as  environmentally  sustainable.  In  particular,  these  undertakings  will  be 

84 

 
required to report the share of their turnover, capital expenditure, and operating 
expenditure that is Taxonomy-aligned. 

Article 5 and 6 of the EU Taxonomy Regulation requires financial undertakings 
to disclose the proportion of taxonomy-aligned investment for all their Article 
8 SFDR products and Article 9 SFDR products.  

In some specific cases, where the information is not publicly available, financial 
and non-financial market participants can rely on specific additional sources to 
complement company reported data for their Taxonomy reporting obligations.  

However, these ‘additional sources’ do not include ‘ESG ratings’: 

- 

- 

‘Equivalent  information’  (as  defined  in  SFDR  Delegated  Act): 
financial  undertakings  can  use  ‘equivalent  information’  for  their 
product-level Taxonomy reporting for companies that are not subject to 
the  Art.8  Delegated  Act  requirements  within  the  TR.  This  would 
typically  include  companies  not  subject  to  the  NFRD.  Equivalent 
information  should  be  considered  information  that  provides  the  same 
content and level of granularity as that provided by the actual regulatory 
reporting  of  companies  and  should  be  provided  by  the  companies 
themselves  or  by  third-party  ESG  data  providers.  The  ESAs  are 
currently developing guidelines on what can be considered ‘equivalent 
information’  and  it  has  not  been  decided  yet  if  ESG  ratings  will  be 
eligible.  
‘Estimates’ (as defined in Art.8 DA): the use of ‘estimates’ is permitted 
under the entity-level disclosure requirements under Art.8 DA for the 
DNSH MSS assessments of third-country companies. 

However, the use of ESG ratings by financial undertakings has been observed 
on the market since January 2022. In fact, some market participants have been 
using  ESG  ratings  to  cope  with  their  taxonomy  product-level  disclosures  in 
order  to  cope  with  the  lack  of  company  Taxonomy  data.  Users  of  ratings 
reported important lack of comparability in the scores provided by ESG rating 
providers, mainly due to lack of transparency in the methodology used.  

Title 

European green bond Regulation 

Legislative  or 
non-
legislative?  

Brief 
description  of 
policy 
or 
legislation 

legislative 

The European Commission proposed its Regulation on European green bonds 
in July 2021, with the aim of creating a new gold standard for green bonds, 
known as the European green bond standard (EuGB). The proposal must be 
approved  by  the  EU  co-legislators  before  this  new  standard  can  enter  into 
application.  

85 

 
 
 
The EuGB would be a voluntary standard, meaning that it would be available 
to all green bond issuers on a voluntary basis, and issuers would still be free 
to make use of market-based standards if they prefer. The standard would be 
usable  by  all  types  of  bond  issuers  and  bonds  (including  corporate  bonds, 
sovereign bonds, project bonds, covered bonds, asset-backed securities, etc.). 

The standard is based on a strong link with the EU Taxonomy Regulation, 
as it requires any issuers that wishes to make use of it to allocate 100% of the 
proceeds of the green bond to finance Taxonomy-aligned economic activities, 
before maturity of the bond.  

By standardising and clarifying the issuance of high-quality green bonds in 
the EU, the standard aims to support issuers in their transition towards climate 
neutrality. The strong link to  the EU Taxonomy will give issuers a  reliable 
way  to  demonstrate  that  their  bonds  meet  the  environmental  and  climate-
related  goals.  It  will  also  help  provide  investors  with  certainty  about  the 
environmental credentials of the bond. 

The  EuGB  is  aligned  with  market  best  practice  on  disclosure  and  external 
review.  In  particular,  issuers  will  need  to  obtain  a  mandatory  pre-issuance 
review, confirming alignment of the bond with the standard, and a mandatory 
post-issuance  review,  confirming  allocation  of  proceeds  to  Taxonomy-
aligned activities. Issuers will be supervised by national competent authorities 
to ensure they comply with the disclosure and external review requirements.  

External reviewers of European Green Bonds will have to be registered 
and supervised with ESMA, which will improve transparency and reliability 
for investors. This will ensure that they comply with certain conditions, such 
as: 
- 
-  Specific organisational requirements: compliance function, separation of 

reviewer and staff are of sufficient competence and experience 

business lines  

-  Disclosure and record-keeping requirements 

The standard will also be open to issuers and external reviewers based outside 
the EU. 

Interaction 
with 
ratings 

ESG 

Issuers  of  future  EU  GBS  bonds  are  required  to  disclose  the  Taxonomy-
alignment of projects funded by their bond. For that purpose, they may seek 
for ESG ratings in particular to obtain underlying data that would serve their 
needs. 

The information disclosed in ESG ratings provide additional information to 
investors, including green bond investors, allowing them to better assess the 
overall non-financial performance of companies. 

Finally,  some  ESG  rating  providers  also  have  some  activities  as  EU  green 
bond verifiers. 

86 

 
 
 
 
 
 
Title 

EU  Climate  Benchmarks:  Regulation  (EU)  2016/1011  as  amended  by 
Regulation (EU) 2019/2089 and the respective Delegated Regulations 

Legislative  or 
non-
legislative?  

Brief 
description  of 
policy 
or 
legislation 

Legislative 

as 

(EU)  2016/1011 

amended  by  Regulation 

(EU) 
Regulation 
2019/2089 creates  two  new  types  of  EU  climate  benchmarks  (EU  Climate 
Transition  and  EU  Paris-aligned  benchmarks)  and  lays  down  a  number  of 
Environmental, Social and Governance (ESG) disclosure requirements for all 
interest  and  foreign  exchange 
benchmarks  (with 
benchmarks). 

the  exception  of 

The minimum standards for the construction of the EU Climate Benchmarks 
and the exact scope and content of the ESG disclosure requirements have been 
further specified in the three delegated acts that were published in the Official 
Journal  on  3  December  2020,  and  which  entered  into  application  on  23 
December 2020.176 

On the disclosure front, the delegated acts require benchmark administrators 
to  explain,  using  a  set  template,  which  ESG  factors  they  have  taken  into 
account  when  designing  their  benchmark  methodology.  They  shall  also 
explain  how  those  factors  are  reflected  in  the  key  elements  of  that 
methodology,  including  for  the  selection  of  underlying  assets,  weighting 
factors, metrics and proxies.  

In  addition,  benchmark  administrators  shall  explain  in  the  benchmark 
statement, using a standard template, how ESG factors are reflected in each 
benchmark or family of benchmarks they provide and publish.  

Finally, benchmark administrators shall disclose information on the alignment 
with the objectives of the Paris Agreement. 

Interaction 
with 
ratings 

ESG 

The Delegated Regulations lay down a list of ESG factors to be disclosed by 
benchmark administrators, for those benchmarks that pursue ESG objectives, 
depending  on  the  type  of  underlying  assets  concerned  (e.g.  equity,  fixed 
income,  sovereign).  Information  on  the  ESG  factors  should  be  made  at  an 
aggregated  weighted  value  of  the  benchmark,  not  for  each  individual 
constituent (company).  

176 Commission Delegated Regulation (EU) 2020/1816 of 17 July 2020 supplementing Regulation (EU) 2016/1011 of the European 
Parliament and of the Council as regards the explanation in the benchmark statement of how environmental, social and governance 
factors are reflected in each benchmark provided and published (OJ L 406, 3.12.2020, p. 1). 
Commission  Delegated  Regulation  (EU)  2020/1817  of  17  July  2020  supplementing  Regulation  (EU)  2016/1011  of  the  European 
Parliament and of the Council as regards the minimum content of the explanation on how environmental, social and governance factors 
are reflected in the benchmark methodology (OJ L 406, 3.12.2020, p. 12). 
Commission  Delegated  Regulation  (EU)  2020/1818  of  17  July  2020  supplementing  Regulation  (EU)  2016/1011  of  the  European 
Parliament  and  of  the  Council  as  regards  minimum  standards  for  EU  Climate  Transition  Benchmarks  and  EU  Paris-aligned 
Benchmarks (OJ L 406, 3.12.2020, p. 17). 

87 

 
 
                                                 
In order for benchmark administrators to be able to disclose such information 
at an aggregated weighted value, they should still be in possession of the data 
from each of the constituent. 

They will have to source the information directly from companies (e.g. via 
their  annual  reports)  or  obtain  this  information  from  external  rating/data 
providers. 

The  Delegated  Regulations  also  lays  down  as  an  option  for  benchmark 
administrators the possibility to disclose information on ESG ratings of the 
benchmark. Better information  over the methodologies used  and objects  of 
the  ratings  should  help  benchmark  administrators  to  have  clarity  over  the 
constituents  of  the  benchmarks  and  the  objectives  they  pursue.  Improved 
quality and reliability of the ratings used by benchmark administrators will 
foster confidence from benchmark administrators, and eventually improve the 
picking up of those ratings as a reliable tool to design meaningful benchmarks. 
For users of benchmarks, it will help them to ensure that they identify the right 
benchmarks that are aligned with their investment strategy and that will allow 
them to implement that strategy, possibly avoiding risks of greenwashing. In 
turn, the positive impact of this initiative on the quality of ESG benchmarks 
will  improve  the  confidence  of  investors  in  ESG  benchmarks,  thus  further 
supporting sustainable investing. 

88 

 
 
 
 
ANNEX 5: SME TEST 

(1) − Identification of affected businesses 

This initiative does not specifically target SMEs, but they would be affected in the following ways.  

First, European ESG rating providers that are SMEs would be directly affected, as they would fall 
under the scope of this initiative. We note that SME ESG rating providers currently appear to make 
up for a large part of the market, at least in numbers (around 45 out of 59 providers are estimated to 
be SMEs), where the market has a few large ESG rating providers.  

As  such,  ESG  rating  providers  would  face  certain  costs,  which  may  be  sizeable  for  SMEs  in 
particular,  hence  the  importance  of  introducing  mitigation  measures  (further  described  below,  in 
section 4). Some of the options which would have created an increase in costs for small providers 
such  as  the  requirement  to  have  standardised  disclosure  templates,  or  the  need  to  comply  with  a 
prescribed methodology have been discarded at an early stage. 

The  preferred  option,  providing  for  authorisation,  organisational  requirements  and  ongoing 
supervision  of  ESG  rating  providers  would  lead  to  important  costs  for  providers.  Feedback  from 
stakeholders points to the high impact of costs related to compliance, authorisation and supervision 
for smaller providers and new entrants. Smaller providers usually need to invest in development and 
research in order to attract new users and to establish their reputation, and additional costs may be 
detrimental  to  them.  On  the  positive  side,  small  providers  that  would  comply  with  the  new 
requirements would benefit reputationally and commercially from the additional transparency and 
regulatory oversight; this benefit could be even higher for SMEs, as being authorised could give them 
additional publicity and trust. 

Second,  users  of  ESG  ratings  that  are  SMEs  (e.g.  smaller  asset  managers  or  other  financial 
institutions)  would  be  indirectly  affected,  benefiting  from  the  increased  transparency  on 
methodologies and objectives of ratings, but also clarity on ESG ratings and providers’ operations.  
Smaller asset managers have much less resources to fully investigate and understand the ESG ratings 
they use and to do complementary checks. Therefore, they are more likely to use and rely on ESG 
ratings without carrying out their own internal assessments. The increased transparency and clarity 
would enable them to do so, and the oversight would increase confidence in the ratings.  

Third,  SME  corporates  that  are  rated  by  ESG  rating  providers  would  also  be  indirectly  affected, 
benefiting  from  the  increased  transparency  and  clarity  on  ESG  ratings  and  providers’  operations 
leading to less time spent by rated corporates on understanding the results of ratings of their own 
companies. It could also help SMEs to use ESG ratings as a check of their sustainability and could 
result in SMEs taking actions to improve their management of ESG risks and impacts. Furthermore, 
this  initiative  could  help  correct  some  of  the  biases  in  ESG  ratings  that  may  currently  negatively 
impact rated SME corporates, as evidenced in the Study.  

 (2) − Consultation of SME stakeholders 

Using data collected in the stakeholder consultations described in Annex 2, this impact assessment 
has analysed the ESG rating providers active in Europe and identified those that qualify as SMEs. 
First,  we  considered  their  feedback  to  the  consultations  (12  out  of  19  ESG  rating  providers  who 
responded  were  SMEs).  The  feedback  of  the  SME  ESG  rating  providers  to  the  consultation  is 
reflected  under  the  relevant  stakeholder  group  in  Annex  2  since  the  SMEs’  feedback  was  mostly 
aligned with the overall stakeholder group.  Of note is that SME ESG rating providers were more 
favourable  toward  a  legislative  intervention,  than  their  larger  competitors.  Then,  the  Commission 

89 

 
services reached out to a number of SME providers for further detailed feedback on the initiative. 
We discussed in particular policy options and their impacts on these providers. We also reached out 
to  several  SME  ESG  rating  providers  who  had  not  responded  to  the  consultation.  The  feedback 
received from this additional outreach is summarized in the next sub-section.  

Similarly, feedback from SME rating users and rated corporates to the consultation is reflected in 
Annex 2 within each respective stakeholder  group.  Almost  a quarter  of the  individual  rating user 
companies responding to the consultation were SMEs, and around 10% of individual rated companies 
responding to the consultation were SMEs. Their feedback was mostly aligned with the respective 
stakeholder  group’s  overall  feedback,  and  they  agreed  on  the  shortcomings  of  the  ESG  ratings 
market. Of note were the facts that proportionately more SMEs found the ESG ratings market to be 
uncompetitive compared to large companies. Also, rated SMEs collectively tended to rely as much, 
if not more, on their ESG ratings to assess their sustainability impacts, than do their larger peers. 
Despite this, proportionately fewer rated SMEs had access to their own ratings, compared to large 
companies. 

(3) − Assessment of the impacts on SMEs  

The Commission aimed to adequately and proportionately assess the impact on SMEs by additionally 
reaching out to SME ESG rating providers after the targeted consultation, as described above in item 
(2). For the purpose of the assessment of impacts, discussions were organised with these providers 
about the policy options and their potential costs and benefits.  

In terms of impact, the biggest impact on the operations of SME ESG rating agencies will stem from 
the requirements related to the authorisation and supervision.. However, the cost of authorisation and 
supervision will be adjusted to the size and revenue of companies. According to our assessment, the 
one-off costs stemming from the authorisation could amount to EUR  68.000177 and the annual on-
going cost of supervision for smaller providers could be in the range of EUR 61-82 thousand per 
provider,  as  compared  with  the  costs  for  bigger  providers  EUR  284-490  EUR  per  provider. 
Supervisory fees would be proportionate to revenues and are expected to be in a lower range of 0.37% 
for smaller providers178. The cost of business adjustments is expected to be low as most of small 
providers focus on one or two services and thus, they do not face the same conflicts of interests as 
bigger providers with more complex business models. On the benefit side, smaller providers can gain 
more visibility and recognition once they receive the authorisation and are subject to the supervision. 
Investors will have more trust in their operations and increased transparency can help them attract 
new users. As regards costs of disclosure requirements, most of SME providers have not considered 
them  to  be  substantial.  They  have  also  recognised  the  need  for  increased  transparency  as  well  as 
benefits that it would lead to. 

From  the  users’  side,  SMEs  (as  asset  managers  or  rated  corporates)  are  also  more  resource 
constrained and hence the ability to more easily understand characteristics of ESG ratings and their 
methodologies and ability to compare them will benefit them proportionately even more than other 
users. 

(4) – Minimising negative impacts on SMEs  

177 Based on input provided by respondents the range could be between EUR 68.000-108.000, with smaller providers 
being closer to the lower range due likely to lower complexity of their business and processes.  
178 According to ESMA assessement, fees could range between 0.37% (for smaller) and 2.4% (for large providers) of 
revenue of providers. 

90 

 
                                                 
First, it is important to note that in the targeted consultation, respondents were split as to views on 
the  exclusion  or  introduction  of  a  lighter  regime  for  smaller  ESG  rating  providers,  for  different 
reasons. 

Some argued that excluding smaller market players would not meet the objectives of this initiative, 
to  bring  more  transparency  and  clarity  over  ESG  rating  providers  overall.  Smaller  ESG  rating 
providers  have  also  differentiated  themselves  from  larger  ESG  rating  providers  by  offering  more 
targeted, specific ESG ratings and they specialise on certain topics179. Others worried that it could 
lead to an un-level playing field, and even negatively impact smaller providers instead of helping 
them, by leading to a perception of ‘lower quality’ of their ratings, as they would not be subject to 
any rules or oversight of their activities. Others still suggested that the rules overall should not be 
burdensome to begin with and should be proportionate by nature (e.g., principle-based) and could be 
phased in, by being first applicable to larger than smaller providers.  

However, and in order to mitigate costs and impacts of new requirements as described under (3), we 
propose the following mitigating measures: 

a.  transition period: To mitigate potential concerns about the administrative burden, once new rules 
enter  into  force,  providers  would  be  allowed  to  continue  operating  on  the  condition  that  they 
notify  ESMA  and  become  authorized  within  a  pre-determined  period  of  time,  the  so  called 
“transition  period”.  The  length  of  the  transition  period  will  be  adapted  to  the  size  of  players, 
giving  smaller  players  more  time  for  completing  the  authorisation  and  in  this  way  easing  the 
administrative burden for them. The transition period could range from 12 to 36 months, based 
on the assumption that the authorisation of one entity takes up to 6 months180.  

b.  adjustment of supervisory fees to the size of the provider. As described in Chapter 6.1.1, under 
Option 3, fees would be proportionately distributed across providers based on their revenues and 
are expected to range between 0.37% and 2.4% of revenues based on a preliminary assessment 
by ESMA, with fees for smaller providers closer to the lower range of 0.37% of their revenues.  
c.  proportionate  supervision:  ESMA  has  adopted  a  risk-based  and  data-driven  approach  when 
conducting supervision181 and prioritises its supervisory activities according to the level of risk 
identified as well as the significance/size of supervised entities. A risk analysis is used to identify 
areas of possible non-compliance and to assess the potential significance of the issue. As a result, 
both  supervisory  fees  and  interaction  with  the  supervisor  would  hence  be  proportionate  to 
provider’s size, mitigating the risk of disproportionate impact on smaller providers. 

d.  provide the possibility for smaller and innovative entities to ask for some exemptions from a wide 
range  of  internal  organisational  measures,  if  the  provider  is  able  to  demonstrate  that  those 
requirements are not proportionate in view of the nature, scale and complexity of its business  and 
the  nature  and  range  of  issue  assessed  by  its  product  (e.g.  data  driven  rater182  or  innovative 
forward-looking rater183). 

(5) Results of discussions with SMEs 

The feedback from SMEs among ESG rating providers was mixed, depending on the provider and 
the relevant policy option.  

179 E.g., Carbon4 – climate transition risks 
180 Based on input provided by ESMA 
181 ESMA risk-based and data-driven approach when conducting supervision 
182 Small group of quants develop a data-driven ESG ratings model, which has very broad firm coverage from day one. 
183 Innovative, but not revenue-producing business that takes more than seven years from founding to finalize its ESG 
ratings model. 

91 

 
                                                 
For the disclosures on methodologies and on operations, SME providers recognised the need for the 
transparency and agreed on the objectives sought by this initiative. On the other hand, some suggested 
tailoring the information to be disclosed to the size and particular business model and not requiring 
a standard template for disclosures in order to  minimize the burden on smaller providers (e.g. by 
reducing the need for large changes to the IT systems to create standardized disclosures).  Others 
agreed on the need for the transparency and haven’t considered it to lead to a substantial increase in 
costs. For the oversight, most of the SME providers considered authorisation and ongoing supervision 
to constitute a substantial cost.  Those costs were seen to be more ‘binary’ in nature, meaning even a 
low level of supervision would necessitate (potentially costly) internal processes and structures to be 
put in place. Nevertheless, some suggested that less intensive supervision of their operations (e.g. 
more flexibility in staffing requirements, less frequent information requests or reviews, etc.) would 
be  more  proportionate,  and  also  in  line  with  a  ‘risk-based’  supervision.  The  providers  pointed  to 
similar examples in the CRA supervisory regime.  

92 

 
 
 
 
ANNEX 6: THE ECOSYSTEM OF ESG RATINGS  

Who uses ESG ratings 

Investors and companies are the prime users and recipients of ESG ratings, given that the majority of 
ESG  ratings  are  provided  by  subscription.  Academics  constitute  another  group  of  users184.  Few 
individual citizens and consumers directly use ESG ratings, but more use such information indirectly, 
for  example  when  considering  the  advice  or  opinions  of  financial  advisers  or  non-governmental 
organisations. 

What is an ESG rating 

IOSCO in its report on a set of recommendations published in November 2021185 has defined ESG 
rating  as  referring  “to  the broad spectrum of  ratings products  that are marketed as providing an 
opinion  regarding  an  entity,  a  financial  instrument  or  product,  a  company’s  ESG  profile  or 
characteristics or exposure to  ESG, climatic or environmental risks or impact  on society and the 
environment,  that  are  issued  using  a  defined  ranking  system  of  rating  categories,  whether  or  not 
these  are  explicitly  labelled  as  “ESG  ratings””.  It  is  the  first  definition  of  ESG  ratings  from  an 
international  organisation.  The  notion  of  ESG  ratings  is  not  otherwise  clearly  framed,  be  it  at 
international,  European  or  national  level  and  various  terms  are  used  today  in  the  market  without 
general consensus and clarity (ratings, scores, valuations). 

In addition, ESG ratings do not constitute a homogenous group. They differ as to what they assess 
(aggregated  ESG, only  individual E, S or G, or even specific indicators within each letter), from 
which  perspective  they  assess  (risks  to  the  company  only,  double  materiality,  impacts  only, 
compliance with international principles), and how they make an assessment (best in the class or in 
absolute terms, quantitative or qualitative assessment). 

ESG ratings providers also have different business models (large, for-profit providers such as MSCI 
and S&P, boutique providers such as Carbon4Finance or non-for profit providers such as CDP) and 
revenue models (user-pay (investors) model, company-pay model, mixed model or public funding).  

In general we can divide ESG ratings into 4 categories, depending on their purpose:  

–  assessing risk (financial perspective) (e.g. MSCI), 

–  assessing impacts (e.g. Carbon4Finance), 

–  assessing compliance with international principles and guidelines (e.g. Standard Ethics), 

–  assessing  supply  chain  sustainability  risks  (not  used  for  direct  investment  purposes) 

(EcoVadis). 

Some ESG ratings assess companies relative to their peers, i.e. corporate sustainability performance 
– for the best in the class (e.g. LSEG/Refinitiv), others in absolute terms (e.g. Carbon4Finance). 

184 E.g. Stanford University, ESG ratings: A compass without direction. 
185 IOSCO, Environmental, Social and Governance (ESG) Ratings and Data Products Providers Final Report, p.47  

 
 
                                                 
Many ESG rating providers offer ratings of both  corporates and portfolios. Some providers rate 
countries. 

The  rating  process  also  differs;  on  the  one  hand  there  are  providers  who  use  fully  automated 
quantitative assessments based on KPIs and data without the involvement of the analyst (quite often 
referred to as scoring)186. On the other hand, there are providers whose rating processes resemble that 
of the credit rating process – based on the analysis of both quantitative and qualitative information, 
with the involvement of the analyst and rating committees187. Both practices fall within scope of this 
work. Fully automated practices should not be considered as different given that they are based on 
criteria set by the relevant company and provide a number, a rating of a company. Yet other providers 
apply a fully qualitative process, based on non-public information and engagement with companies, 
based solely on the  analytical  judgement on the  forward-looking  perspective, and delivered as an 
opinion from the ratings agency (e.g. S&P ESG Valuation). 

Depending on the process  and business model,  as well as  whether the  companies being rated  are 
listed or not, some ESG rating providers use only public data, others use a mixture of public and non-
public and a few use only non-public information188.  

Who develops ESG ratings 

There are two major groups of ESG ratings providers: the first is specialised entities and the second 
is financial institutions and other participants (mainly asset managers and benchmark administrators 
but also some banks or analysts in investment firms). The first group is currently unregulated and not 
subject to any oversight. Some big groups have regulated legal entities within their structures, like 
credit  rating  agencies  and  thus  fall  under  the  scope  of  the  Credit  Rating  Agency  Regulation  or 
benchmark  administrators  that  fall  under  the  Benchmark  Regulation.  The  regulated  entities  are 
separate legal entities and they don’t provide ESG ratings. The second group is subject to extensive 
regulation and supervision, in particular the AIFMD, UCITS and SFDR. 

Another difference between those two groups is that specialised entities develop ESG ratings  as a 
business model, that they commercialise their ratings for the use of professional investors or rated 
companies, whereas asset managers, benchmark administrators or other financial institutions develop 
ESG ratings for  their  own purposes.  In the case of asset  managers, in-house ESG ratings of own 
investment funds are used mainly for their investment decisions. According to the Study, “This is 
also how asset managers consider that they add value for their clients and differentiate themselves 
in the market by adding proprietary classifications and methodologies. They as a result can generate 
independent and differentiated insights into sustainability-related topics ahead of the market.” In the 
survey conducted for the Study and the IRRI Survey 2019189, 75% of asset managers anticipated an 
increased demand for both in-house and external ESG ratings.  

In the case of benchmark administrators, in-house ESG ratings serve as a basis for the construction 
of  sustainability  benchmarks.  EU  law  also  gives  the  possibility  for  benchmark  administrators  to 
disclose ESG ratings in the benchmark statement over benchmarks that pursue ESG objectives190. 

186 E.g. LSEG/Refinitiv, Bloomberg 
187 E.g. MSCI, S&P 
188 Cadwalader, Wickersham & Taft LLP, European Union: ESG Ratings: A Call For Greater Transparency And Precision 
189 IRRI Survey 2019.  
190 Commission Delegated Regulation (EU) 2020/1816, OJ L 406, 3.12.2020, p. 1–11. 

94 

 
 
                                                 
Anecdotal  evidence  also  suggests  that  some  asset  managers  may  use  in-house  ESG  ratings  in 
contracts  with  benchmark  administrators  for  the  development  of  customised  benchmarks.  They 
however do not directly sell the ESG ratings themselves. As such asset managers’ and benchmark 
administrators’ ESG rating activities fall outside the scope of this impact assessment. 

According to KPMG estimates in the IOSCO Report, worldwide there are around 160 ESG data and 
rating providers. ESMA estimated the number of ESG rating providers operating in the EU (in June 
2022) to be 59191. 

As far  as the structure of the market  is  concerned, there is  a small  number of very large non-EU 
entities and a large number of significantly smaller EU entities.  

Recent  years  have  also  seen  consolidation,  with  mostly  large  players  acquiring  smaller  and 
specialized targets.192 The Study noted that “The business model and governance structure for how 
multiple products  and acquisitions are managed across  a single provider varies by firm, and the 
structure becomes more complex with each new acquisition.” According to the Russell Investment 
2020 survey193, the three largest ESG rating and data providers based referenced by asset managers 
globally  are  MSCI  ESG  Research  (42%  of  asset  managers  surveyed  subscribe  to  their  services), 
Sustainalytics (37%) and ISS-oekom (31%). 

Moreover, with the exception of ISS, which was acquired by Deutsche Börse AG in November 2020, 
the major providers are all currently headquartered in North America or the United Kingdom. This 
includes leading providers MSCI, S&P, Moody’s, Fitch’s, and CDP. All these groups have operations 
in the EU, due in part to the acquisitions of previously well-established EU headquartered providers 
such as Sustainalytics, Vigeo Eiris, Oekom and SAM. The leading providers all sell products to EU-
headquartered investors and include EU companies in their coverage.  

Specialised ESG rating providers broadly fall into three categories:  

  For-profit  large  providers  that  offer  multiple  sustainability-related  products  and  services,  as 

well as non-sustainability-related products and services194;  

  For-profit  boutique  providers  that  offer  speciality  sustainability-related  products  and 

services195;  

  Non-profit providers that offer sustainability-related products and services.196 

In addition, they use different revenue models: 

191 ESMA Call for Evidence on ESG Ratings 
192  E.  Avetisyan  and  K.  Hockerts,  “The  Consolidation  of  the  ESG  Rating  Industry  as  an  Enactment  of  Institutional 
Retrogression”, Business Strategy and the Environment 26, no. 3, March 2017. 
193 Russell Investment 2020 survey 
194 E.g. MSCI, S&P, Moody’s 
195 E.g. Sustainometric, Solactive, RepRisk, Truvalue Labs (prior to October 2020 acquisition by FactSet), Sustainable 
Value Investors, Carbon4 Finance, ISS (prior to the November 2020 acquisition by Deutsche Börse AG 
196 E.g. CDP, ShareAction WDI, As You Sow 

95 

 
 
                                                 
–  user pay model – subscription fee is paid by asset managers, benchmark administrators and 

asset owners, ESG ratings are used for investment purposes. 

–  company pay model – fee paid by the company which requests a rating on its own operations 
or  on  the  supply  chain,  some  ratings  are  private  hence  not  made  available  to  the  general 
public,  company  decides  if  it  wants  to  publish  ratings.  Some  ESG  ratings  are  used  for 
investment purposes, some for other purposes such as to understand operational risks or seek 
opportunities. 

–  mixture  of  two  –  requesting  client  (a  buyer  organization)  has  a  fixed  cost  (based  on  its 

revenue) and rated company in the supply chain pays a fee which depends on its size 

–  revenue from re-selling data and ratings to other ESG rating providers 

–  public funding – CDP is partly funded from public money (including EU funds) and partly 

from fees from commercial activities 

The Study clarifies that the majority of ESG rating or score providers have organised their business 
model defining the level of granularity of information to stakeholders based on the relation to them, 
i.e.  whether  they  are  rated  companies  or  clients/investors.  The  level  of  granularity  also  differs 
depending on the providers, notwithstanding the relationships. According to the study, those that are 
ready to pay a – unique – or subscription fee are given additional level of details compared to the 
general public and information on their website, which is either not present or high-level197. Many 
ESG  rating  providers  also  mentioned  in  the  context  of  the  Study  that  they  do  provide  additional 
information to clients (subscribers) and to companies who pay for access to different databases198.. 
The additional information provided to companies could come in the form of benchmarking tools199 
to improve performance and/or specific paid services to understand how to improve ratings. 

How is data verified 

Data sources utilized by ESG rating providers fall into a few major categories: data directly from the 
rated  company,  unstructured  data  from  alternative  sources  (such  as  the  internet,  literature,  media 
reports, satellite images), data from public databases, and third-party data that has already flowed 
through a different provider200. Though the primary source of information identified by most ESG 
rating providers is self-disclosed company data (both public and non-public), they also commonly 
utilize data from all other types of sources with distinctions depending on the methodology, approach 
and product or service offered. Where providers are not able to get direct corporate data, they will 
often  estimate  data.  Based  on  the  findings  from  the  Study,  the  bulk  of  data  estimation  occurs  in 

197 The Study noted that for example ISS, MSCI and Vigeo Eiris maintain company portals to engage companies, receive 
updates and provide company reports and methodologies (in more detail than what is publicly disclosed). This enables 
companies to review the underlying indicators they are assessed on. 
198 For example, FTSE Russell’s ESG Ratings and data model are available to subscribers through a web interface.  
199 Are ESG ratings really necessary?, GreenBiz,  Richard Mattison, “If you are a company going through this assessment, 
you'd log into a portal and see all of this [ESG] information with explanations and help. They get free benchmarking 
tools to allow them to compare themselves with their peer groups. The companies find this very useful, because it allows 
them to understand the leading topics of note from our perspective and how they compare with their peers on a number 
of different elements.". 
200 See the Study, and also CEPS ‘a critical look at the ESG market’. 

96 

 
 
                                                 
specific  issue  areas,  such  as  carbon  emissions,  and  in  estimates  of  revenue  that  are  affected  by  a 
particular sustainability-related issue. ESG rating providers have various multi-step approaches to 
assuring the quality of the datasets they use, both in terms of errors, and timeliness of data updates, 
but  companies  and  investors  alike  have  expressed  frustrations  at  low  data  quality,  inaccurate 
information  and absence of clarity  as to  how estimations  (if any, where data is  not  available) are 
effectively made201. 

201 Reply from AFEP to the Commission Consultation on ESG ratings. 

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ANNEX 7: GLOBAL REVIEW OF ESG RATING INITIATIVES  

The topic of ESG data and ESG ratings has been on the European Commission’s radar for several 
years and the EU was perhaps the first in considering the possibility of regulating (part of) the market 
as far back as 2018 in the first sustainable finance action plan, in addition to legislation aiming to 
improve comparability and reliability of sustainability reporting. The market has continued to evolve 
rapidly since then and other jurisdictions have also increased their focus on this market, particularly 
but not only on the reporting and ESG data aspects, with numerous regulations in place and on the 
way.202 We have reviewed various past and ongoing (private and public) initiatives to understand the 
global  landscape  for  ESG  rating  providers  in  particular,  given  the  focus  of  this  initiative.  This 
provides  an  important  backdrop  for  the  rest  of  this  impact  assessment  given  that  ESG  rating 
providers, as well as ESG rating users or ESG-rated entities, are often active in multiple jurisdictions. 

International 

In November 2021, IOSCO published a report203 highlighting concerns related to ESG ratings and 
data provision and issuing recommendations to address those concerns. IOSCO defined ESG ratings 
with  a  wide  scope:  “the  broad  spectrum  of  ratings  products  that  are  marketed  as    providing  an  
opinion  regarding  an  entity,  a  financial  instrument  or  a  product,  a  company’s  ESG  profile  or 
characteristics or exposure to  ESG, climatic or environmental risks or impact  on society and the 
environment that are issued using a defined ranking system of rating categories, whether or not these 
are explicitly labelled as “ESG ratings””. Specifically, IOSCO identified the following concerns: 

a)  there  is  little  clarity  and  alignment  on  definitions,  including  on  what  ratings  or  data  products 

intend to measure;  

b)  there  is  a  lack  of  transparency  about  the  methodologies  underpinning  these  ratings  or  data 

products;  

c)  while there is  wide divergence  within the ESG ratings and data products industry, there is  an 
uneven coverage of products  offered, with  certain industries or geographical  areas benefitting 
from more coverage than others, thereby leading to gaps for investors seeking to follow certain 
investment strategies;  

d)  there may be concerns about the management of conflicts of interest where the ESG ratings and 
data  products  provider  or  an  entity  closely  associated  with  the  provider  performs  consulting 
services for companies that are the subject of these ESG ratings or data products; and  

e)  better communication with companies that are the subject of ESG ratings or data products was 
identified as an area meriting further attention given the importance of ensuring the ESG ratings 
or other data products are based on sound information. 

To address these concerns, IOSCO issued the following recommendations to various actors: 

  Regulators could consider focusing more attention on the use of ESG ratings and data products 

and ESG ratings and data products providers that may be subject to their jurisdiction.  

  ESG  ratings  and  data  products  providers  could  consider  adopting  and  implementing  written 
procedures designed to help ensure the issuance of high quality ESG ratings and data products 

202 Jurisdictions looking at these topics include US, Russia, China, Japan, Singapore, India, Brazil, Chile. 
203 ESG Ratings and Data Products Providers.  

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based on publicly disclosed data sources where  possible and other information  sources where 
necessary, using transparent and defined methodologies.  

  ESG  ratings  and  data  products  providers  could  consider  adopting  and  implementing  written 
policies  and  procedures  designed  to  help  ensure  their  decisions  are  independent,  free  from 
political or economic interference, and appropriately address potential conflicts of interest that 
may arise from, among other things, the ESG ratings and data products providers’ organizational 
structure, business or financial activities, or the financial interests of the ESG ratings and ESG 
data products providers and their officers and employees.  

  ESG ratings and data products providers could consider identifying, avoiding or appropriately 
managing,  mitigating  and  disclosing  potential  conflicts  of  interest  that  may  compromise  the 
independence and objectivity of the ESG ratings and ESG data products provider’s operations.  
  ESG  ratings  and  data  products  providers  could  consider  making  adequate  levels  of  public 
disclosure and transparency a priority for their ESG ratings and data products, including their 
methodologies and processes to enable the users of the product to understand what the product is 
and  how  it  is  produced,  including  any  potential  conflicts  of  interest  and  while  maintaining  a 
balance with respect to proprietary or confidential information, data and methodologies. 

  ESG  ratings  and  data  products  providers  could  consider  adopting  and  implementing  written 
policies and procedures designed to address and protect all non-public information received from 
or  communicated  to  them  by  any  entity,  or  its  agents,  related  to  their  ESG  ratings  and  data 
products, in a manner appropriate in the circumstances.  

  Market  participants  could  consider  conducting  due  diligence  or  gathering  and  reviewing 
information on the ESG ratings and data products that they use in their internal processes. This 
due  diligence  or  information  gathering  and  review  could  include  an  understanding  of  what  is 
being rated or assessed by the product, how it is being rated or assessed and, limitations and the 
purposes for which the product is being used.  

  ESG  ratings  and  data  products  providers  could  consider  improving  information  gathering 
processes  with  entities  covered  by  their  products  in  a  manner  that  leads  to  more  efficient 
information procurement for both the providers and these entities.  

  Where  feasible  and  appropriate,  ESG  ratings  and  data  products  providers  could  consider 
responding to and addressing issues flagged by entities covered by their ESG ratings and data 
products while maintaining the objectivity of these products.  

  Entities  subject  to  assessment  by  ESG  ratings  and  data  products  providers  could  consider 
streamlining  their  disclosure  processes  for  sustainability  related  information  to  the  extent 
possible, bearing in mind jurisdictions’ applicable regulatory and other legal requirements. 

Various jurisdictions, including the ones highlighted below, took  IOSCO’s recommendations into 
account when looking into the ESG data and ratings area. 

United Kingdom 

In June 2021, the  FCA  published a consultation  paper  "Enhancing  climate-related disclosures by 
standard listed companies and seeking views on ESG topics in capital markets"204. The paper also 
addressed the role of ESG data and ratings providers and identified various policy issues for ESG 
rating providers and areas of potential harm in the FCA’s view. Some of these areas of concern were: 

204 FCA - Enhancing climate-related disclosures by standard listed companies and seeking views on ESG topics in capital 
markets. 

99 

 
 
                                                 
the "hardwiring" of ESG ratings into investment processes; 

 
  a lack of transparency of methodologies and interpretability of ESG ratings; 
 
 

the need to ensure good governance and management of conflicts of interest; and 
the costs for issuers of meeting providers’ data requests. 

In that paper the FCA identified various policy options to address these concerns, such as “guidance” 
for users of third party ESG data and ratings (including in relation to risk management, outsourcing 
arrangements, due diligence and use of ratings in benchmarks and indices), “soft regulation” for ESG 
data and rating providers (encouraging voluntary standards), or formal regulation of ESG data and 
ratings  providers,  focusing  on  transparency,  governance  and  managing  conflicts  of  interest.  The 
paper called for views from market participants on these options until September 2021 and the FCA’s 
final  policy  was announced for  the  first  half of  2022. Following this,  in  October 2021  the  FCA's 
Perimeter Report 2020/21205and the government’s "Greening Finance: A Roadmap to Sustainable 
Investing"206 echoed similar ideas.  

In December 2021, the FCA's CEO and the Economic Secretary to the Treasury (EST) discussed the 
FCA's Perimeter Report, including the issue of ESG data and ratings. A record of this meeting stated 
"The  EST  noted  that  there  have  been  discussions  on  ESG  ratings  and  potentially  bringing  the 
providers  into  the  perimeter.  The  CEO  noted  that  there  is  support  for  the  government’s  work  to 
consider bringing ESG ratings providers into the perimeter."  

In June 2022 the FCA published the feedback statement based on the 2021 consultation, where it 
stated “We see a clear rationale for regulatory oversight of certain ESG data and rating providers – 
and for a globally consistent regulatory approach informed by the recommendations on ESG data 
and  ratings  developed  by  the  International  Organization  of  Securities  Commission  (IOSCO)  in 
2021…We  therefore  support  the  Government’s  consideration  of  bringing  ESG  data  and  rating 
providers within our regulatory perimeter. As noted by the Economic Secretary to the Treasury and 
our Chief Executive Officer, ‘common baseline standards that support innovation would allow the 
UK to lead globally’.” As such, at this stage it appears likely that regulating ESG data and rating 
providers  is  in  the  regulatory  pipeline  of  the  UK,  focusing  on  “enhancing  transparency  of  ESG 
ratings and data products and their methodologies, assisting users in interpreting what they aim to 
measure  and  how,  and  promoting  strong  governance,  conflicts  management,  and  systems  and 
controls to underpin data and rating products and give the market confidence that they are objective, 
independent  and  free  from bias,  determined  as  the  result  of  a  systematic  process,  and  of  reliable 
quality.” 

Most  recently,  on  30  March  2023  the  UK  government  published  it  is  green  finance  strategy207, 
incuding  plans  to  regulate  ESG  rating  providers.  The  public  consultation  foresees  giving  a  new 
mandate to Financial Conduct Authority (FCA) to regulate ESG ratings firms due to concerns over a 
lack of transparency, conflicts of interest and poor governance in the sector. The consultation is open 
until the end of June 2023. 

Japan 

205 FCA Perimeter Report 2020/21.  
206 Greening Finance - A Roadmap to Sustainable Investing.  
207 Mobilising Green Investments, March 2023 

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Japan’s  financial  regulator,  Financial  Services  Agency  (FSA)  published  a  report  in  June  2021, 
“Report  of  the  Expert  Panel  on  Sustainable  Finance,"  recommending  that  the  FSA  promote 
discussions  on  codes  of  conduct  for  ESG  evaluation and  data  providers.  Then,  in  February  2022 
established  a  Technical  Committee  for  ESG  Evaluation  and  Data  Providers,  composed  of  market 
participants  and  academics.  The  discussions  and  conclusions  of  the  Technical  Committee  were 
summarized in a report published in July 2022, and also formed the basis of the draft Code of Conduct 
for ESG evaluation and data providers208 published at the same time.  

The report particularly highlighted the importance of dialogue between investors, rated entities, and 
ESG  evaluation  and  data  providers,  so  the  Code  of  Conduct  aims  to  enhance  said  dialogue. 
Importantly, the Code of Conduct proposes to cover not just ESG evaluations on an issuer and/or 
instrument  basis,  but  also  the  provision  of  data  related  to  such  evaluations.  It  is  designed  as  a 
principles-based,  voluntary  ‘comply  or  explain’  code,  applicable  to  all  ESG  evaluation  and  data 
providers  that  either  participate  in,  or  provide  services  to  participants  in,  the  Japanese  financial 
markets. The Code of Conduct is intended to cover both ‘subscriber-pays’ and ‘issuer-pays’ business 
models, although certain provisions differ in their detail based on the applicable business model. The 
high-level principles are listed here for reference. 

First, “ESG evaluation and data providers should ensure the quality of ESG evaluation and data they 
provide.  The  basic  procedures  necessary  for  this  purpose  should  be  established.”  This  includes 
measures such as establishing consistent methodologies, assessing evaluation results against those 
methodologies, and ensuring data quality even when the collection is outsourced. Second, providers 
should “secure necessary professional human resources to ensure the quality of the evaluation and 
data provision services they provide, and should develop their own professional skills”, although the 
FSA acknowledges the current shortage of expertise in this rapidly expanding market.  

Third, providers should “establish effective policies so that they can independently make decisions 
and appropriately address conflicts of interest that may arise from their organization and ownership, 
business,  investment  and  funding,  and  compensation  for  their  officers  and  employees,  etc.  With 
regard to conflicts of interest, providers should identify their own activities and situations that could 
undermine  the  independence,  objectivity,  and  neutrality  of  their  business,  and  avoid  potential 
conflicts of interest or appropriately manage and reduce the risk of conflict of interest.” For example, 
firewalls and suitable compensation schemes could be used to manage conflicts of interest. FSA also 
points out that providers with more complex evaluation methodologies may need to provide more 
disclosures and have more stringent measures in place to assure clients that the evaluations are free 
of such conflicts.  

Fourth, providers should “recognize that ensuring transparency is an essential and prioritized issue, 
and publicly clarify their philosophy in providing services, such as the purpose, approach, and basic 
methodology  of  evaluations.  Methodologies  and  processes  for  formulating  services  should  be 
sufficiently disclosed.” FSA notes that due consideration can be given to intellectual property while 
ensuring transparency. Disclosures should also include information on the data collection, such as 
data  sources  and  use  of  estimates.  FSA  notes  that  the  Code  assumes  general  publication  of 
disclosures,  although  it  acknowledges  that  each  provider  should  make  a  judgment  as  to  what  is 
disclosed to the public versus to the provider’s direct clients and/or rated entities. Indeed, the fifth 

208 FSA - The Code of Conduct for ESG Evaluation and Data Providers.  

101 

 
 
                                                 
principle  ensures  data  protection:  providers  “should  establish  policies  and  procedures  to 
appropriately protect non-public information obtained in the course of business.”  

Sixth  and  last,  providers  “should  devise  and  improve  the  way  they  gather  information  from 
companies so that the process becomes efficient  for both service providers and that companies or 
necessary information can be sufficiently obtained. When important or reasonable issues related to 
information source are raised by companies subject to evaluation, ESG evaluation and data providers 
should appropriately respond to the issues.” Finally, an appendix includes expectations that investors 
understand the characteristics and differences of the evaluations they use, and publicly clarify how 
they have used them in their investment decisions.  

The draft code was open for public comments until September. 

India 

India is another jurisdiction that has been active in sustainable finance topics in general, and ESG 
ratings in particular. First, in May 2021 the Securities and Exchange Board of India (SEBI), India’s 
financial regulator, issued revised sustainability reporting requirements “Business Responsibility and 
Sustainability Report”, BRSR, requiring listed companies to disclose the financial implications of, as 
well as plans to mitigate or adapt to, ESG risks. BRSR filing will be mandatory from the financial 
year  2022-23  onwards  for  the  top  1000  listed  companies  by  market  capitalization,  while  other 
companies can voluntarily issue BRSRs. Second, in October 2021 SEBI proposed new disclosure 
norms for mutual funds that invest using ESG criteria. 

Most recently, in a consultation paper launched in January 2022209, SEBI took note of the increased 
need for sustainable finance in the coming years and the growing role of ESG rating providers in 
channeling  such  investments.  SEBI  mentioned  potential  risks  to  “investor  protection,  the 
transparency and efficiency of markets, risk pricing, and capital allocation” stemming from the lack 
of  regulatory  oversight  of  those  providers.  Following  discussions  with  market  participants,  SEBI 
concluded  that  there  is  ambiguity  about  the  wide  range  of  products  offered,  inconsistency  in 
disclosures and transparency of the methodology and rating process, potential conflicts of interest, 
and lack of India-specific providers. It thus proposed a regulatory framework to address these issues 
and achieve better interpretability, comparability, and reliability.   

In  brief,  the  proposed  regulatory  framework  includes  an  accreditation  scheme  to  ensure  that  a 
provider  has  adequate  capital,  infrastructure,  and  skilled  manpower  to  conduct  its  activities. 
Relatedly, any listed entity, mutual fund, alternative investment fund or index provider using an ESG 
rating would need to use a SEBI accredited provider. SEBI proposed that only registered credit rating 
agencies  (CRA)  and  research  analysts  (RA)  with  a  minimum  net  worth  to  ensure  adequate 
capitalization  would  be eligible  to  be  accredited,  and  they  would  need  to  have  specialists  in  data 
analytics, sustainability, finance, IT and law. The accreditation would be subject to review every two 
years, but could be revoked at any time.  

As for the product scope of the framework, SEBI proposed to limit it to ESG impact ratings, ESG 
corporate risk ratings and ESG financial risk ratings. According to SEBI, ratings covering only the 

209 Securities and Exchange Board of India -Consultation Paper on Environmental, Social and Governance (ESG) Rating 
Providers for Securities Markets.  

102 

 
 
                                                 
environmental aspect, for example, should not be called ESG ratings by the providers and would not 
fall under the framework. While SEBI considered the possibility of standardizing the rating scale for 
ESG  ratings,  it  concluded  that  it  would  be  premature  at  this  stage.  The  SEBI  proposal  requires 
disclosure of rating methodologies including definitions, KPIs and weights of each component, data 
sources and estimates used and an annual evaluation of methodologies against results. It also requires 
providers  to  have  and  implement  policies  to  ensure  proper  and  consistent  application  of  rating 
methodologies and rigorous assessments by qualified rating committees. The SEBI proposal includes 
measures  to  prevent  conflict  of  interest,  such  as  requiring  a  dedicated  policy,  separating  rating 
personnel from other personnel, remunerating rating personnel in a way that avoids conflict of interest 
and disclosing any potential conflict of interest between rating activities and other activities. Lastly, 
the SEBI proposal looks at the existing business models in the industry and considers mandating the 
prevalent one for all, i.e. the subscriber-pays business model.  

The consultation closed in March 2022 and as of the date of the conclusion of this impact assessment, 
no feedback statement has been published by SEBI. 

Other 

A number of other jurisdictions such as Switzerland, Nigeria, Hong Kong, Indonesia, Singapore, and 
Thailand have been taking action in the ESG area, usually around enhancing the reporting of listed 
companies, without (yet) intervening in the ESG ratings market specifically.  

Currently, ESG disclosures are not regulated in the US, but in June 2021 the House of Representatives 
passed  an  ESG  Disclosure  Simplification  Act  that  would  require  listed  companies  to  disclose 
quarterly  and  annual  ESG  metrics.  The  act  also  assigned  authority  to  the  Securities  Exchange 
Commission  (SEC)  to  define  the  metrics  and  require  the  necessary  disclosures.  However,  the  act 
needs to pass through the second chamber, the Senate, in order to become law and as yet, no such 
vote has taken place or been scheduled.  

Private initiatives 

ESG  rating  providers  themselves  have  made  individual  and  collective  efforts  to  address  certain 
issues. In addition to internal codes of conduct at many, if not most, providers, there are (at least) 2 
instances of industry standards that were established.  

First, the standard currently known as ARISTA was supported with initial funding by the European 
Commission in 2004 and has been an industry-specific quality standard for ESG rating and research 
organizations for over 10 years. In 2004, a number of independent Responsible Investment Research 
(RIR)  Groups  working  for  customers  in  the  financial  services  industry  formed  the  AICSRR 
(Association for Independent Corporate Sustainability and Responsibility Research). AICSRR was 
later renamed Association for Responsible Investment Services (ARISE). The standard was formerly 
known as CSRR-QS (Corporate Sustainability and Responsibility Research Quality Standard) and 
was relaunched in 2012 as ARISTA (Responsible Investment Research Standard).   

The purpose of the standard is to encourage independence, objectivity and professionalism; quality 
management systems; transparency; assurance processes and research characteristics viewed as best 
practices. The standard aims to form a basis for further verification procedures in addition to the in-
house  assurance  processes.  The  standard  covers  various  aspects  of  the  company  such  as  the 
organisational and managerial structure, its research processes and its assessment processes. In terms 

103 

 
 
of  products  and  services,  the  standard  covers  the  collection  of  corporate  sustainability  and 
responsibility (CSR) data and related research, analysis, evaluation, rating, ranking, screening, and 
risks  and  opportunities  assessments.  In  2012,  10  groups  had  been  certified  against  the  ARISTA 
standard, including Vigeo Eiris, EthiFinance, imug, oekom research, GES, Ecodes, CAER, Greeneye 
and KOCSR, with Ecovalores and Inrate preparing to follow their example. However, as of 2022 this 
does not appear to be in common use. 

Second,  another  market-based  standard  was  the  “Deep  Data  Delivery  Standard”210,  developed  in 
2016. Investment professionals and academics from across the world developed a list of 10 principles 
for deep data sets; it was intended as a public good that any asset manager or asset owner could use 
in contracting third-party data providers. 

The first five principles outline key characteristics of the data and related processes such as scope, 
identification, and machine readability, while standards six to ten help ensure the integrity of the data 
providers. To meet this standard, deep data sets need to be delivered: 

1)  with a minimum of 5 years historical data on at least 30 independent indicators per data set (e.g., 
credit rating, ESG data) whereby any data point that is not delivered as reported at the respective 
point in time should be flagged as backfilled; 

2)  with 98% value weighted market coverage, where a market (e.g. equity index) is claimed to be 

covered; 

3)  with an assurance that ratings will be reconsidered for at least 8.25% of the companies covered 

in the average month of the following year; 

4)  including  considerate,  accurate  identifiers  (e.g.  ISINs)  for  99%  of  the  firms  covered  in  every 

month of current and historical data coverage; 

5)  in  machine  readable  format  (e.g.,  CSV,  XML)  and  with  proper  documentation  of  the  data 

structure; 

6)  with an assurance of individual rating independence meaning that none of the rated entities in the 
respective market  (e.g.,  equity index) financially contributed to  their  rating or paid  for access 
solely to their own rating; 

7)  with an assurance of organizational rating independence meaning that whenever rating agencies 
win entities as new clients which they also rate an independent analysis is conducted if these new 
clients receive, statistically significant, higher ratings than in the year before and any biases found 
in this analysis will be addressed within 12 months; 

8)  with an assurance that all research or rating reports in the following year will indicate names and 
office locations of all analysts substantially involved in the analysis as well as the extent to which 
their data sources exceed those self-reported by the rated entity; 

9)  with an assurance that all research or rating reports in the following year will include a logbook 
detailing  any  errata,  where  applicable,  as  well  as  the  dates  and  roles  of  participants  in 
communication with the rated companies; 

10) accompanied by the ratio of the rating agency’s research costs to total cost or the ratio of research 

head count to total head count in the most recent financial year. 

A number of providers were certified once against the standard after 2016, but as of 2022 it too does 
not appear to have become a widespread industry standard. 

210 Deep Data Delivery Standard.  

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105 

 
 
 
 
 
 
 
ANNEX 8: INCORPORATION OF ESG FACTORS INTO CREDIT RATINGS   

Background 

The provision of credit ratings was regulated after the financial crisis of 2008.  

In the period leading up to the financial crisis in 2008, credit rating agencies (CRAs) failed to properly 
appreciate the risks in more complex financial instruments. For instance, structured finance products 
backed  by  risky  sub-prime  mortgages  were  issued  with  incorrect  ratings  that  were  far  too  high. 
During the subsequent euro area debt crisis, certain countries were faced with abrupt bond selloffs 
and higher borrowing costs following a downgrade of their credit rating. In addition, investors relied 
excessively on external credit ratings, without carrying out their own due diligence. 

In response, the Commission made proposals to strengthen the regulatory and supervisory framework 
for CRAs in the EU, in order to restore market confidence and increase investor protection. The new 
EU rules were introduced in three consecutive steps. 

The first set of rules, which entered into force at the end of 2009, established a regulatory framework 
for CRAs and introduced a regulatory oversight regime, whereby CRAs had to be registered and were 
supervised by national competent authorities. In addition, CRAs were required to avoid conflicts of 
interest, and to have sound rating methodologies and transparent rating activities. In 2011, these rules 
were amended to take into account the creation of the European Securities and Markets Authority 
(ESMA), which now supervises CRAs registered in the EU. A further amendment was made in 2013 
to reinforce the rules aimed at enhancing market competition and addressing weaknesses related to 
sovereign debt credit.  

The CRA Regulation211 provides the following definition of a credit rating: 

“credit  rating  means  an  opinion  regarding  the  creditworthiness  of  an  entity,  a  debt  or  financial 
obligation, debt security, preferred share or other financial instrument, or of an issuer of such a debt 
or financial obligation, debt security, preferred share or other financial instrument, issued using an 
established and defined ranking system of rating categories”. 

Credit Ratings  assess the risk of default  of a company and should capture all the risks  that may 
affect  creditworthiness  -  including  sustainability  risks  where  relevant.  Credit  ratings  are  used  by 
investors to calibrate portfolio risk profiles (including for investment products).  

Credit ratings are also important for the calculation of prudential requirements under the EU’s Capital 
Requirements Regulation (CRR) and Solvency II and are used by the European Central Bank as one 
element in its open market operations; with the ECB recognising the shortfall in integration of climate 
risks  in  credit  ratings  and  introducing  additional  requirements  on  climate  risks  in  its  market 
operations as of October 2022. 

Changes  in  credit  ratings  or  rating  outlooks  can  have  important  impacts  on  financial  markets, 
financial stability and the broader economy.  

211 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02009R1060-20190101  

106 

 
 
                                                 
As far as links with the market of ESG rating providers are concerned, some large groups have within 
their  structures,  both  a  legal  entity  registered  with  ESMA  as  a  Credit  Rating  Agency,  as  well  as 
entities that provide ESG ratings. However, due to the legal requirements, CRAs cannot provide ESG 
ratings.  

ESG factors in credit ratings 

ESG risks, starting from climate- and environment-related risks are an increasingly material source 
of risk for all economic  actors and are likely to  be more  and more relevant  to  assess  companies’ 
that  may  affect 
creditworthiness.  Credit  ratings  are  defined  as  opinions  about  factors 
creditworthiness, which may also include sustainability factors, among many others. 

The CRA Regulation requires CRAs to incorporate in their assessment all driving factors relevant 
for the assessment of creditworthiness. CRAs should therefore consider these risks and integrate them 
in a systematic and rigorous way where relevant for a creditworthiness assessment. 

Both the report of the HLEG on Sustainable Finance212, 2018 Sustainable Finance Action Plan213 and 
the  2021  Strategy  on  Financing  the  Transition  to  a  Sustainable  Economy214  acknowledged  the 
importance of incorporation of ESG factors in the creditworthiness assessment and asked ESMA for 
advice. 

In 2019 ESMA provided its Technical Advice to the Commission215 stating that it is not advisable to 
explicitly mandate the consideration of sustainability characteristics in  CRA’s credit assessments, 
and concluded the following:  

 “While it is clear that the CRAs contacted are considering E, S or G factors in their credit ratings, 
the  extent  to  which  each  factor  is  considered  varies  by  asset  class,  according  to  the  importance 
assigned to that factor by a CRA’s methodology for the purpose of assessing credit worthiness. As a 
result, while ESG considerations can be a factor, credit ratings should not be understood as providing 
an opinion on sustainability characteristics of an issuer or entity”. 

“In addition, given the specific role credit ratings continue to occupy within the financial system the 
Technical Advice concludes that it would not be advisable to amend the CRA Regulation to more 
explicitly mandate the consideration of sustainability characteristics in  CRA’s credit assessments. 
Although it could be useful to update the CRA Regulation’s disclosure provisions, to provide a more 
consistent level of transparency around how CRAs are considering ESG factors in these assessments 
and ensure the CRA regulatory framework keeps pace with ESG developments in other areas.  

Finally,  given  the  trajectory  of  EU  financial  market  legislation  towards  integrating  sustainability 
assessments in the operational and decision-making processes of financial market participants, it may 

212 https://finance.ec.europa.eu/publications/high-level-expert-group-sustainable-finance-hleg_en  
213 2018 Sustainable Finance Action Plan  
214 https://finance.ec.europa.eu/publications/strategy-financing-transition-sustainable-economy_en  
215 https://www.esma.europa.eu/esmas-activities/sustainable-finance/cras-and-sustainability  

107 

 
 
                                                 
be relevant to assess whether there are sufficient regulatory safeguards in place elsewhere for those 
non-credit rating products that will fill the need for such sustainability considerations.”216 

Further to the above mentioned, in 2019 ESMA issued Guidelines on disclosure requirements217 that 
include recommendations for how CRAs should present which credit ratings have been impacted by 
ESG factors. In 2021, ESMA carried out an assessment of results of Guidelines218 and, in addition, 
reviewed how CRAs incorporate ESG factors in their methodologies. 

Based  on  the  recent  ESMA  assessments219  as  well  as  the  results  of  the  targeted  consultation  and 
meetings with stakeholders, two main problems have been identified: 

  Varied degree of rigorousness of the incorporation of ESG factors in the assessment of 
creditworthiness. Furthermore, there is heterogeneity in the identification and definition of 
ESG factors across CRA methodologies. 

  Insufficient  disclosure  in  relation  to  ESG  factors  that  have  influenced  changes  to  credit 
ratings. ESMA’s assessment suggests that although there has been an increase in the overall 
level of ESG disclosures in CRAs’ press releases since the introduction of the Guidelines on 
Disclosure  Requirements  applicable  to  credit  ratings  in  2019,  there  is  room  for  further 
improvement. 

Incorporation of ESG factors  

The CRA Regulation requires CRAs to incorporate all driving factors relevant for the assessment of 
creditworthiness. In order to assess the level of integration of ESG factors into CRAs’ credit rating 
methodologies, ESMA has carried out a thematic review of their methodologies and rating process.  
ESMA’s assessment included not only CRAs’ credit rating methodologies, but also research papers, 
internal guidance documents, and rating committee packages. 

Based on ESMA thematic review220, since 2019, CRAs have developed two types of approaches to 
integrating ESG factors in their credit rating process:   

  ESG-specific credit methodologies:  Three CRAs have introduced  formal ESG-specific 
credit methodologies, which are either of a transversal or a sector-specific nature. These 
methodologies tend to apply in combination rather than as standalone with other credit 
rating methodologies that are already in place.  

  ESG-specific research or white papers: Two CRAs have integrated the consideration of 
ESG factors into their credit rating process by reference to published research or white 
papers. However, these do not adhere to the same governance, validation and transparency 
rules as the ESG-specific methodologies. 

216 ESMA Technical Advice to the European Commission on Sustainability Considerations in the credit rating market. 
217 https://www.esma.europa.eu/esmas-activities/sustainable-finance/cras-and-sustainability  
218 https://www.esma.europa.eu/policy-activities/sustainable-finance/cras-sustainability  
219ESMA  was  mandated  to  (i)  assess  the  implementation  of  the  updated  guidelines  aimed  at  improving  disclosure  of 
information  on  how  sustainability  factors  are  taken  into  account  in  credit  ratings  and  outlooks;  (ii)  review  how 
sustainability  factors  are  incorporated  by  CRAs  in  their  methodologies.  ESMA  has  delivered  its  assessment  of  the 
application  of  guidelines  in  September  and  October  2020.  The  assessment  of  the  incorporation  of  ESG  factors  in 
methodologies has been concluded in May 2022.  
220 https://www.esma.europa.eu/sites/default/files/library/newsletter_june_2022.pdf 

108 

 
 
 
                                                 
Across  CRAs’  ESG  methodologies,  research  and  white  papers,  there  are  different  degrees  of 
rigorousness.  In  general,  CRAs’  ESG-specific  documentation  only  loosely  establishes  how  ESG 
factors are to be assessed. This gives CRAs significant  leeway to use "expert judgement" in their 
application. Only one CRA in the sample had taken the additional step to introduce more specific 
quantitative measures and indicators to be considered when assessing the credit impact of ESG risks. 

Another conclusion refers to heterogeneity in the identification and definition of ESG factors across 
CRA methodologies and frameworks. There is currently no common definition of ESG factors. The 
situation  may  change  as  there  are  a  few  ongoing  initiatives  at  the  European  and  global  levels: 
introduction of the EU taxonomy for sustainable activities can contribute to a greater standardisation 
of environmental impacts, the work of EFRAG on the European Sustainability Reporting Standards 
and the work initiated by the International Sustainability Standards Board to deliver comprehensive 
sustainability-related disclosure standards may foster more comparability across CRAs. 

Although  these  ESG-specific  methodologies  and  research  or  white  papers  were  new,  their 
introduction did not induce significant changes at the level of ratings. The absence of impact on credit 
rating levels suggests that any introduced changes were mainly a formal codification  of what had 
existed practice. CRAs echoed this view when this observation was raised with them. 

Regarding the application of methodologies: CRAs diverge in the systematic consideration of ESG 
factors in their credit rating processes and have different degrees of detail in the assessment of ESG 
factors. Inputs in the rating process are mainly qualitative and provided by issuers. Rating committee 
documents  show  a  high  level  of  expert  judgment  that  is  not  always  linked  to  methodologies. 
Combined,  these  findings  may  be  indicative  of  the  general  low  level  of  rigorousness  of 
methodologies. 

Transparency 

Transparency around credit rating actions is  a key objective of the CRA Regulation  and plays an 
important role in the context of enhancing investor protection and promoting properly functioning 
financial markets. The CRA Regulation includes a number of requirements relating to the disclosure 
and presentation of credit ratings. Their purpose is to enable investors to understand the key drivers 
and  assumptions  of  the  credit  rating,  any  limitations  underpinning  the  credit  rating,  as  well  as 
references to where other relevant information can be found. Improving transparency around credit 
rating actions has been a key objective of ESMA’s supervisory and policy engagements for a number 
of  years.  As  part  of  this  work,  in  2019,  ESMA  issued  the  Guidelines  to  improve  the  disclosures 
around credit rating actions.  

The goal of the Guidelines is to ensure greater transparency around the consideration of ESG factors 
where they are material to a credit rating action. In particular, the Guidelines provide that where ESG 
factors have been key drivers behind a change to the credit rating or rating outlook, CRAs should 
identify the relevant factors, elaborate on their materiality, and include a reference explaining how 
ESG  factors  are  considered  as  part  of  the  credit  rating  process,  for  example  within  their 
methodologies. Prior to the publication of the Guidelines, ESMA conducted a public consultation 
and received input from various market participants. The feedback ESMA received from this process 
outlined  that  market  participants  were  generally  supportive  of  the  need  for  greater  consistency 
regarding CRA’s disclosure practices, as well as supportive of ensuring transparency concerning the 

109 

 
 
 
 
relevance of ESG factors to credit ratings. ESMA published the final Guidelines in July 2019 and has 
been considering them for the purposes of its supervision since 30 March 2020. 

ESMA also analysed the possible impact of the Guidelines on ESG disclosures since their entry into 
force in April 2020221. In this regard, ESMA’s assessment of CRAs’ ESG disclosures practices is 
based on the application of natural language processing (NLP) techniques to more than 60,000 press 
releases reported to ESMA by these three CRAs over the period from January 2019 to December 
2020, thereby accounting for over 90% of the total credit rating activity in this period.  

ESMA findings show that there has been a notable (c. 60%) increase in the reporting of ESG factors 
after the introduction of the Guidelines, concentrated in environmental and social disclosures, and to 
a lesser extent governance (see Figure 1 below): 

Figure 1: Press releases (%) with meaningful ESG considerations 

Figure 2a below shows that the Guidelines had a positive effect on ESG disclosures by large CRAs. 
It is worth noting that 3 large CRAs account for 91% of the market. 

Figure 2a: Average ESG Score across CRAs 

221 https://www.esma.europa.eu/document/text-mining-esg-disclosures-in-rating-agency-press-releases  

110 

 
 
 
                                                 
During fall 2021, ESMA carried out an additional assessment of disclosures made by smaller CRAs. 
Adding smaller CRAs has not changed the overall assessment: there is an overall increase in ESG 
disclosures  (c  50%).  However,  disclosures  of  small  CRAs  are  more  volatile,  resulting  from  the 
smaller number of reported rating actions. It is important to remember that not all rating are caused 
by the sustainability factors. 

Figure 2b: Average ESG Score across CRAs 

One of the key findings is that the improvement in ESG disclosures is not uniform across all CRAs 
in the sample. In fact, the overall improvement is mainly driven by one large CRA that significantly 
increased the reporting of ESG factors in its press releases after April 2020. 

Figure 3: ESG Score Heterogeneity 

111 

 
 
 
 
ESMA  is  of  the  opinion  that  some  heterogeneity  might  be  expected  given  the  differences  in  the 
respective CRA methodologies. It will however also take further steps, using its supervisory powers, 
to address the observed gap in the level of ESG disclosures across CRAs. 

Results of the targeted consultation: 

Use of credit ratings 

Credit ratings are used for investment decisions, but they are not decisive factors, more so one of 
many sources of information (36.8%) or as a starting point (10%). 

For the majority of users it is either is very important (46%)  or important (26%) to understand to 
what extent individual credit rating actions have been influenced by sustainability factors. 

Respondents agree that it is important that credit rating agencies are transparent about the factors that 
drive changes in credit ratings. Where an ESG factor impacts the credit risk of a company/security, 
they expect that factor to be incorporated into the credit risk assessment. It is important for users to 
understand whether the factors have been considered to ensure they are not considered twice or not 
at all. However, respondents also stressed that credit ratings should remain credit ratings and measure 
only credit risk.  

Transparency  

Almost  half  of  respondents  (49%)  cannot  find  information  about  the  extent  to  which  CRA’s 
methodologies  or  the  rating  process  incorporate  sustainability  factors  to  be  sufficiently  well 
disclosed. 

Users look for that information both on public websites as well as reports available to subscribers.  

The majority of respondents (55%) are of the opinion that the level of disclosure differs depending 
on individual CRAs. There are significant differences depending on the maturity of the CRA provider 
in  term  of  ESG  understanding.  The  degree  of  disclosure  depends  also  on  the  maturity  of  the 
methodology adopted by the CRA: the higher the degree of maturity, the more transparency. 

112 

 
 
 
Many respondents claim the level of disclosure has improved (38%), but only 15% claim that it is 
sufficient, whereas 24% claim that it remains insufficient despite some improvements.   

As far as the incorporation of ESG factors in the methodologies and rating process are concerned 
more respondents are of the opinion that it is sufficient (37%) than insufficient (21%). 

 Opinions of CRAs 

7 CRAs replied to questions about CRAs: All replied that they explicitly incorporate ESG factors 
into their methodologies. They all incorporate all types of sustainability factors: E, S and G.  They 
all have a framework or document describing how they incorporate ESG factors in the credit rating 
process.  They  all  have  improved  disclosures  on  ESG  factors  and  follow  ESMA  Guidelines  on 
disclosures.  

The majority (5 out of 7) consider the current trends are sufficient to ensure that CRAs incorporate 
relevant ESG factors in credit ratings. Only one CRA sees the need for further detailing of ESMA 
Guidelines on disclosures.  

In the case of the EU intervention, the majority of CRAs identified the risk of excessive importance 
being  attributed  to  ESG  factors  as  compared  with  other  factors  relevant  for  the  assessment  of 
creditworthiness. Others claim that it will bring  a more coherent approach to the incorporation of 
ESG factors into credit ratings.  

In a scenario where there would be no  EU intervention, 4 CRAs claim that market trends will be 
sufficient to meet investors’ demands for information on the impact of ESG factors on credit ratings, 
whereas  3  CRAs  are  of  the  opinion  that  the  existing  gap  between  approaches  of  CRAs  to  the 
incorporation of ESG factors in credit ratings will grow. 

Opinions on the need for the EU Intervention  

There is an almost even split between those who consider that the current trends in the market are 
sufficient to ensure that CRAs incorporate relevant ESG factors in credit ratings (42%) and those 
who disagree (40%). 

As far  as disclosures  are concerned, the majority (68%) don’t  consider market  trends  and ESMA 
Guidelines to be sufficient.  

Out of those who don’t consider the current situation sufficient, the majority favours a soft approach 
(55%): further detailing ESMA Guidelines (37%) or further supervisory actions by ESMA (18%). 
Only 24% are in favour of the legislative intervention.  

Possible policy options 

It is important to remember that CRAs are independent in the choice of methodologies and factors 
used for the assessment of creditworthiness. The principle of independence is embedded in the EU 
legislation as well as IOSCO principles.  

There are 2 policy dimensions examined below: 

1)  incorporation of ESG factors in the methodologies and rating process 

113 

 
 
2)  disclosure to the public  

Policy options regarding dimension 1) incorporation of ESG factors in the methodologies and 
rating process: 

Option 1 – Specify in the CRA Regulation that in the case of the incorporation of ESG factors in the 
creditworthiness  assessment,  CRAs  must  do  this  in  a  systemic  way  and  develop  relevant 
methodologies via the targeted amendment of the CRA Regulation222 and subsequent amendments 
of the delegated act on methodologies223 ;’ or 

Option 2 – Amend the delegated act on methodologies in order to set conditions that methodologies 
need to meet in the case of the incorporation of ESG factors in creditworthiness assessment224 

Policy options regarding dimenasion 2) disclosures to the public: 

Option 1 – Require CRAs to include a clear explanation as to whether and how ESG factors were 
considered  within  the  CRA’s  methodologies  via  the  update  of  Annex  I  to  CRA  Regulation  and 
subsequent amendments of ESMA Guidelines; or 

Option 2 – via the amendment of ESMA Guidelines. 

Analysis: 

The main area that can  be further improved relates to  the  rigorousness  of the inclusion of ESG 
factors  in  CRA’s  methodologies.  The  general  principles  regarding  methodologies  set  up  by  the 
Credit Rating Agencies Regulation already apply to the incorporation of ESG factors in credit ratings, 
whereas precise details concerning the conditions which methodologies should meet are specified in 
the  delegated  act  on  the  methodologies  for  CRAs225.  Our  assessment  is  that  changes  to  the  CRA 
Regulation would need to be accompanied by the changes to the delegated act. It is also possible to 
amend the delegated act without amending the Regulation itself. Given time and resources needed to 
amend the Regulation and then the delegated, in our assessment it is more effective and efficient to 
amend the delegated act directly. 

As regards the disclosure requirements, the Credit Rating Agencies Regulation includes a number 
of  requirements  in  that  respect226.  The  regulation  requires  that  CRAs  disclose  information  to  the 
public  on  their  methodologies,  models  and  key  rating  assumptions  which  they  use  in  their  credit 
rating activities. With a view to ensuring transparency, disclosure of any material modification to the 
methodologies and practices, procedures and processes of credit rating agencies need be made prior 
to  their coming into effect,  unless extreme market  conditions  require an immediate change in  the 

222  Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating 
agencies 
223  Commission  Delegated  Regulation  (EU)  No  447/2012  of  21  March  2012  supplementing  Regulation  (EC)  No 
1060/2009 of the European Parliament and of the Council on credit rating agencies by laying down regulatory technical 
standards for the assessment of compliance of credit rating methodologies 
224 Idem 
225 Idem 
226 Section D of Annex I or CRA Regulation  – Rules on on the presentation of credit ratings and rating outlooks 

114 

 
 
                                                 
credit  rating.  Specific  disclosure  requirements  are  provided  for  in  the  Annex  I  to  the  CRAR 
Regulation. They have been further detailed in ESMA Guidelines. 

The CRA Regulation includes also a number of disclosure requirements relating to the issuance of 
credit ratings227. The purpose of these requirements is to ensure a sufficient level of transparency 
around the characteristics of the credit ratings themselves. This transparency enables the user of the 
credit  rating  to  understand  the  main  reasons  for  the  credit  rating,  any  limits  or  uncertainties 
underpinning the credit rating as well as where further information can be found to facilitate their 
own due diligence. This information is typically disclosed through the issuing of a publicly disclosed 
press release. Those transparency requirements have been subject to further clarifications by ESMA. 

In  order  to  further  improve  the  transparency  the  Commission  could  amend  the  Annex  I  of  CRA 
Regulation by including specifying that CRAs need to disclose the information on ESG factors that 
have influenced the credit rating change.  

CRA  Regulation  lays  down  the  empowerment  for  the  Commission  to  update  the  Annex  I  via  a 
delegated act in view of market developments. More specifically, such a mandate is set out in Art 37 
of CRA regulation : 

“In order to take account of developments, including international developments, on financial 
markets, in particular in relation to new financial instruments, the Commission may adopt, by 
means of delegated acts in accordance with Article 38a and subject to the conditions of Articles    
38b  and  38c,  measures  to  amend  the  Annexes, excluding Annex III.” 

At the same time, large CRAs have continued improving their disclosures, and disclose now more 
than it is required by ESMA Guidelines. 

Positions from various stakeholders 

227 Examples from Section D of Annex I of CRA Regulation: 

I.  A credit rating agency shall ensure that at  least: 

(a) substantially material sources, including the rated entity or, where appropriate, a related third party, which were used to prepare 
the credit rating or rating outlook are indicated together with an indication as to whether the credit rating or rating outlook has been 
disclosed to that rated entity or related third party and amended following that disclosure before being issued; 
 (b) the principal methodology or version of methodology that was used in determining the rating is clearly indicated, with a reference 
to its comprehensive description; where the credit rating is based on more than one methodology, or where reference only to the 
principal methodology might cause investors to overlook other important aspects of the credit rating, including any significant 
adjustments and deviations, the credit rating agency shall explain this fact in the credit rating and indicate how the different 
methodologies or these other aspects are taken into account in the credit rating; 
(c) the meaning of each rating category, the definition of default or recovery and any appropriate risk warning, including a sensitivity 
analysis of the relevant key rating assumptions, such as mathematical or correlation assumptions, accompanied by worst-case scenario 
credit ratings as well as best-case scenario credit ratings are explained; 
 (d) the date at which the credit rating was first released for distribution and when it was last updated including any rating outlooks is 
indicated clearly and prominently; 
(e) information is given as to whether the credit rating concerns a newly issued financial instrument and whether the credit rating 
agency is rating the financial instrument for the first time; and 
(f) in the case of a rating outlook, the time horizon is provided during which a change in the credit rating is expected. 
When publishing credit ratings or rating outlooks, credit rating agencies shall include a reference to the historical default rates 
published by ESMA in a central repository in accordance with Article 11(2), together with an explanatory statement of the meaning of 
those default rates. 

II.  A credit rating agency shall accompany the disclosure of rating methodologies, models and key rating assumptions with guidance 
which explains assumptions, parameters, limits and uncertainties surrounding the models and rating methodologies used in credit 
ratings, including simulations of stress scenarios undertaken by the credit rating agency when establishing the credit ratings, credit 
rating information on cash-flow analysis it has performed or is relying upon and, where applicable, an indication of any expected 
change in the credit rating. Such guidance shall be clear and easily comprehensible 

115 

 
 
                                                 
 
Results of the targeted consultation show mixed views. There is almost even split between those who 
consider that the current trends in the market are sufficient to ensure that CRAs incorporate relevant 
ESG  factors  in  credit  ratings  (42%)  and  those  who  disagree  (40%).  As  far  as  disclosures  are 
concerned, the majority (68%) don’t consider market trends and ESMA Guidelines to be sufficient. 
Out of those who don’t consider the current situation sufficient, the majority is favour soft approach 
(55%): further detailing ESMA Guidelines (37%) or further supervisory actions by ESMA (18%). 
Only 24% are in favour of the legislative intervention. 

The majority of CRAs (5 out of 7) consider the current trends are sufficient to ensure that CRAs 
incorporate relevant ESG factors in credit ratings. Only one CRA sees the need for further detailing 
of ESMA Guidelines on disclosures. 

Majority of respondents (55%) to the targeted consultation were in favour of the soft approach, as 
compared with only 24% in the favour of the legislative intervention  

On the other hand, the ECB has expressed its support for a regulatory intervention, as it relies on 
comprehensive credit ratings for its monetary policy and financial stability mandates. 

Conclusions  

Incorporation of ESG factors in methodologies  

Taking  into  account  the  legal  framework,  where  the  requirements  in  regard  to  methodologies  are 
specified in RTS and based on ESMA advice, it seems sufficient to review RTS on methodologies to 
ensure more rigorous incorporation of ESG factors in the methodologies. This will be in line with the 
proportionality principles. The preferred policy option would therefore be Option 2.  

Disclosure requirements 

In  order  to  introduce  stronger  requirements,  the  Commission  could  explore  using  the  delegation 
foreseen in the CRA Regulation to amend and update the Annex I. The preferred policy option would 
therefore be Option 1.  

116 

 
 
 
 
 
 
 
 
 
 
ANNEX 9: OPTIONS DISCARDED AT EARLY STAGE   

The following options have been considered but discarded at an early stage for the reasons described. 

  Regulatory treatment of ESG rating providers 

Description of option: 

Require registration and supervision at the national level for providers falling into the scope.  

Reasons for discarding this option: 

The market of ESG rating providers is global. The biggest providers operate in a number of Member 
States. They may be headquatered in one Member State and have subsidiaries in others, or may be 
headquartered outside the EU and have EU subsidiaries.  

Evidence gathered by ESMA indicates that among those located in the EU, the majority of entities 
had their headquarters or legal domicile in three Member States: Germany, Italy and France. In eight 
Member States there are either one or two providers.  The remaining Member States host no providers 
(see below diagrams). 

117 

443221111111844211111102468101214DEITFRESSEHULUDKPONLGRRONOLegal entity and corporate headquarter established in EULegal entity established in EUNote:NumberofrespondentswithoneormorelegalentityinEUorwithheadquartersintheEU,bycountry.Source:ESMA22255221202468101214161820Legal entity established in EULegal entity and corporateheadquarters established in EUIndependent legal entity, no groupstructureParent company witihin group structureSubsidiary within group structureIndependent legal entity, no group structureNote:NumberofrespondentsbynatureofestablishmentandnatureoflegalentitySource:ESMA 
 
 
 
While the Commission is pursuing the European Green Deal and developing European Sustainability 
Reporting  Standards,  it  would  highly  be  inefficient  for  each  Member  State  to  set  up  a  national 
supervisory  framework  for  the  supervision  of  one  or  two  entities,  that  are  often  operating  on  a 
European, if not global scale. 

Any national system would be inappropriate due to the fact that some providers have subsidiaries in 
more  than  one  Member  State,  as  well  as  provide  services  cross  border,  the  national  competent 
authorities would need to closely co-operate to ensure coherent enforcement. Therefore, any system 
of national supervision would need to be supplemented by the EU level co-ordination. As a result, 
administrative costs would be even higher, as in addition to costs of setting up and running national 
supervision, there would be the costs of an EU level co-ordination mechanism. 

  Harmonising methodologies of ESG rating providers 

Description of option: 

This option envisages the harmonisation of methodologies used by ESG rating providers, and they 
would agree on common definitions and objectives. 

Reasons for discarding this option: 

Firstly, the results of the targeted consultation show 65% of respondents welcome variety of types of 
ESG ratings. This has been confirmed during exchanges with various stakeholders. 

Next, currently ESG rating providers use own classifications and definitions of Environmental, Social 
and Governance factors. There are no global or european standards developed for the use by ESG 
rating providers.. Although there are some classification systems developed recently for corporates, 
like the Taxonomy Regulation, or being developed currently, like European Sustainability Reporting 
Standards, they have been developed with different objectives in mind. The Climate Delegated Act 
covers 2 of 6 environmental objectives related to impacts (climate change mitigation and adaptation) 
and  only  9  sectors  (forestry,  manufacturing,  energy,  water  and  waste,  transport,  buildings,  ICT, 
research and financial services).  The European Sustainability Reporting Standards  will be addressed 
to corporates,  whereas data reported by corporates constitutes only a small fraction of data used by 
ESG rating providers. Anecdotal evidence suggests that ESG data reported by corporates constitutes 
circa 10% of all data points used by ESG rating providers. ESG ratings providers use data from many 
sources, not only coporates, so there would be the need to assess the suitability of ESRS  for the use 
by ESG rating providers. 

Thirdly,  ESG  ratings  pursue  different  objectives  and  cover  different  areas.  Subsequently,  the 
harmonisation  would  require  development  of  the  classification  system  of  objectives.  The  next 
dimension that would need to be harmonised is the weightings of E, S and G factors in the case of 
aggregated  ratings,  and  separately  methodologies  for  disaggregated  or  topical  ratings.  As  a  result 
several types of methodologies would need to be developed – for different classes (topics), objectives, 
and types – aggregated or disaggregated and topical. The last remaining dimension would be related 
to rating method- opinion vs algorithmically score.   

The next important question is who would have such an expertise and reputation as to judge which 
approach, which methodology is best, given that the current variety of approaches reflects differences 
in views on how to assess the complexity of ESG factors. If decisions on the content of methodologies 

118 

 
 
were to be taken at the political level, that could impact the reliability of methodologies and ratings. 
For  that  reason,  in  a  similar  market  of  credit  rating,  CRAs  are  guaranteed  the  independence  of 
methodologies they use. 

The situation may change in a near future, as there are a few ongoing initiatives at the European and 
global levels. The work of EFRAG on the European Sustainability Reporting Standards and the work 
initiated  by  the  International  Sustainability  Standards  Board  to  deliver  a  comprehensive 
sustainability-related  disclosure  standards  may  foster  more  convergence.  The  harmonisation  and 
standardisation  of  sustainability  data  reported  by  companies  is  expected  to  have  positive  impact. 
Currently, ESG rating providers face problems due to the gaps in the data reported by corporates, 
different formatting and different classification used by reporting companies. As a result ESG rating 
providers need to standardise data themselves and look for the data from different sources as well as 
use estimations when no data is available. This leads to differences already at the input level. If input 
data is harmonised, the results should be more comparable. 

Next, users welcome diversity in products that are offered and are not calling for the harmonisation 
of methodologies. They also welcome different objectives pursued by ESG ratings. The variety of 
objectives and methodologies is an answer to different and changing needs of users. The results of 
the targeted consultation show 65% of respondents welcome variety of types of ESG ratings. 

Finally, defining the objectives and methodologies would affect innovation in this market and new 
ways of measuring ESG risks and impacts. 

  Setting minimum requirements on the content of ESG ratings 

Description of option: 

The proposal could specify the minimum content of ESG ratings 

Reasons for discarding this option:fann 

As explained above, users welcome the diversity of asessments  and do not call for regulating the 
content of ESG ratings (the results of the targeted consultation show 65% of respondents welcome 
variety  of  types  of  ESG  ratings).  In  addition,  the  ESG  ratings  pursue  a  variety  of  objectives  and 
respond to demands from the professional investors. As explained above, the existing classification 
systems has been developed for corporates and not for the use by ESG rating providers. In addition, 
such an option would affect the inovation in this market. 

  Requiring the use of detailed templates for disclosure requirements 

Description of option: 

The Commission could propose the use of disclosure templates by ESG rating providers. This would 
allow for additional comparability of information by users of ESG ratings. 

Reasons for discarding this option: 

The  market  of  ESG  ratings  is  a  new  and  growing  market  with  providers  offering  variety  of 
assessments/opinions.  Users  welcome  that  diversity  and  are  in  general  sophisticated  institutional 
investors.  The  introduction  of  standardised  templates  for  disclosures  might  have  some  negative 

119 

 
 
effects on innovation and development as it would force providers to limit to providing information 
on  given  elements  and  not  disclose  additional  information  that  in  fact  is  useful  to  users  of  ESG 
ratings. There is a risk that the nature and substance of the methodology would be lost. Templates 
would need to not be giving an exhaustive list of information to be disclosed and should also take 
into  account  the  different  business  models  and  objectives  pursued  by  ESG  ratings.  Rating 
methodologies  by  their  nature  differ  from  one  provider  to  another  and  information  to  be  made 
available should inform of the specificities. Therefore it is likely that it would require development 
of a number of different templates, which would likely undermine the overall objective of this option. 
Simplified  templates  would  result  in  omitting  specific  information,  whereas  detailed  and  long 
templates would be burdensome. 

The  CRA  Regulation  also  does  not  provide  for  requirements  on  templates.  The  Benchmark 
Regulation does require the use of templates  for  what concerns the explanation in the benchmark 
statement and benchmark methodology on how ESG factors are reflected. It is therefore in a clearly 
defined situation, contrary to the market of ESG ratings which is very diversified and complex. The 
template also gives the possibility for benchmark administrators to provide for a hyperlink where all 
details can be found on their website. 

Requiring the use of templates would create additional costs and burdens for smaller providers and 
new entrants. ESG rating providers would need to implement new procedures, and potentially renew 
or adapt their existing IT and reporting infrastructure. 

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ANNEX 10 ADDITIONAL EXPLANATIONS AND CHANGES INTRODUCED FOLLOWING THE OPINION OF 
THE REGULATORY SCRUTINY BOARD   

Question 1  

How do investors use ESG ratings in investment decisions? How do the ESG ratings affect the 
allocation of capital ? 

Recent years have seen an important growth in sustainable investing, and specifically in the use of 
ESG ratings, and this sector is expected to continue to grow in the coming years (studies find annual 
growth of ESG data (including ESG ratings) to be 28%228). Almost all respondents to the Commission 
targeted consultation, from investors to issuers and ESG rating providers also mentioned the growing 
importance of ESG ratings in the market for sustainable investing. This is driven by increased demand 
for ESG investments and regulatory obligations. 

ESG ratings are used  by  professional  investors229  who wish  to  incorporate ESG factors into their 
investment decision-making processes, mainly by screening or assessing companies in their various 
funds  and  portfolios.  ESG  ratings  are  also  used  as  a  framework  for  corporate  engagement  and 
stewardship.  

The Study230 commissioned by DG FISMA found that ESG ratings are the most frequently referenced 
source of information that professional investors rely on to assess ESG performance (55%). Another 
survey conducted by Ninety One231 found that 88% of investment professionals use third-party ESG 
ratings as a part of their investment process, with 92% expecting to do so in the future. 

In the Commission targeted consultation supporting this initiative, investors were asked a question 
on how decisive ESG ratings are in their decision processes. They indicated that ESG ratings are 
important, used mainly as a starting point in their analysis but also further down in their decision 
process. They highlighted that they also use other, similar, ESG tools to complement their analysis 
such  as  controversy  scores  or  assessments,  exclusion  lists  but  also  United  Nations  Sustainable 
Development  Goals  alignment  assessments.  In  follow-up  meetings,  they  stressed  that  one  of  the 
reasons for using these other means is the lack of trust in and clarity of the ESG ratings’ market. In 
their responses to the consultation but also in follow-up meetings, investors also highlighted that ESG 
ratings are important for assessing risks and opportunities. 

As  a  result,  ESG  ratings  have  an  important  effect  on  the  allocation  of  capital  by  investors  to 
companies.  ESG  ratings  are  one  of  the  determining  factors  of  whether  company  shares  will  be 
included in ESG-themed mutual or exchange-traded funds. 

We have provided additional explanations, in the Problem Definition and Annex 2 on the ESG 
ratings  ecosystem,  on  the  concrete  use  of  ESG  ratings  by  investors  from  responses  to  the 

228 Environmental Finance, ESG data market (including ESG ratings) ‘to more than double, to $5bn'. 
229 ESG ratings are sold by ESG rating providers to professional investors. Retail investors are typically not purchasing 
or using these, although from exchanges with stakeholders it appears that they start to pay closer attention to ESG ratings 
and may consider basing their investment decisions on them. 
230 Study on sustainability-related ratings, data and research 
231 See Ninety One survey here. 

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Commission  consultation  and  other  sources,  and  on  the  importance  of  ESG  ratings  in  the 
investment  decision-making process. We will also  add additional data sources in  these two 
parts on the expected growth of the ESG ratings market. 

Question 2  

Are there viable options on the geographical scope, type of ESG rating provider and on defining 
(or not defining) ESG ratings? Are there alternative combinations of the options on regulatory 
treatment and transparency beyond the ones presented?  

(1) 

Geographical scope 

We  have  analysed  alternative  options  on  the  geographical  scope,  namely  the  differentiation  of 
requirements for the entities located in the EU as opposed to those located outside the EU. We have 
concluded that the option limiting the geographical scope to the territory of the EU would lead not 
only to an unlevel playing field and a competitive disadvantage for EU providers, but also would not 
reach the objectives of the initiative, and as a result doesn’t constitute a viable option. 

As  explained  in  the  Impact  Assessment,  European  providers  are  smaller  in  size,  and  yet  need  to 
compete  with  larger  non-EU  providers.  Many  of  the  smaller  providers  and  start-ups  have  been 
acquired by larger providers as the market is undergoing consolidation. If, in addition to the ongoing 
consolidation, only European providers were to be subject to new requirements, then they would face 
additional costs and would be placed at a disadvantage vis-à-vis non-EU providers. At the same time, 
users of ESG ratings would continue to face problems of lack of transparency as well as uncertainty 
as to the quality and reliability of ESG ratings, as large non-EU providers would not be subject to the 
requirements.  

A similar approach has  been taken  in  other financial services legislation,  including in  the area of 
sustainable finance. For example, in the Credit Rating Agencies Regulation, where the non-EU CRAs 
that want their credit ratings to be used in the EU need to meet the requirements of EU legislation. 

Summing up, we have concluded that there is no other viable option than the one presented in the 
Impact Assessment, to create a level playing field for all ESG rating providers operating in the EU. 
In  order  to  achieve  that,  the  initiative  cannot  leave  out  any  providers,  no  matter  where  they  are 
located, as long as they provide ESG ratings to European regulated financial institutions and other 
regulated financial market participants as well as to European non-financial companies.   

(2) 

Type of ESG rating providers 

As  explained  in  the  Impact  Assessment,  there  are  two  major  groups  of  ESG  ratings  providers: 
specialised  entities  providing  ESG  ratings  to  professional  investors  and  companies,  as  well  as 
financial institutions developing ESG ratings for their own purposes, principally for internal analysis 
or  marketing.  The  latter  use  their  own  proprietary  models  and  don’t  provide  ESG  ratings 
commercially to other entities. Therefore, the key problem that this initiative aims to address (i.e. 
information asymmetry between providers and users of ESG ratings) does not materialize in their 
case.  Furthermore,  financial  institutions  are  regulated  entities  and  are  already  subject  to  sectoral 
legislation. 

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Therefore, the development of ESG ratings for own purposes is out of the scope of this analysis. The 
focus of the initiative is on the specialised entities whose business model is to develop ESG ratings 
and provide it to professional investors as well as companies.   

We have clarified in the IA that the development of ESG ratings by regulated financial institutions 
for own purposes is out of scope of this initiative. Therefore we do not see any alternative options 
related to the type of ESG rating providers. 

(3) 

Defining ESG ratings 

The intention of this initiative is indeed to introduce a clear definition of what is to be understood as 
an ESG rating. It would be primarily based on the definition from IOSCO’s set of recommendations 
published in November 2021, where ESG ratings are referred to  as  “the  broad  spectrum  of  ratings  
products  that  are  marketed  as  providing  an  opinion regarding an entity, a financial instrument 
or  a  product,  a  company’s  ESG  profile  or  characteristics  or  exposure  to  ESG,  climatic  or 
environmental risks or impact on society and the environment that are issued using a defined ranking 
system of rating categories, whether or not these are explicitly labelled as ‘ESG ratings’. It is crucial 
that the definition recognises the specificities and diversity/complexity of the ESG ratings market: 
ESG ratings can differ in their processes (involvement of an analyst or pure Artificial Intelligence / 
algorithmic driven), in their scope (e.g. looking into the full ESG spectrum or only a subset) and in 
what they measure (risks or impacts). 

We have clarified that we will introduce a definition of ESG ratings in the legislation. 

The introduction of a definition of ESG ratings is necessary to define the scope of legislation and 
application of its requirements. This will bring further clarity to all market participants and more 
trust in this market as only ESG ratings subject to authorisation can be marketed in the EU. 

(4) 

Alternative combinations of options 

We  have  pre-analysed  the  possibility  of  alternative  combinations  of  options  on  the  regulatory 
treatment and transparency, and decided to present and analyse the most feasible and impactful ones 
in order to keep the structure of the Impact Assessment as simple as possible. 

For  example,  a  combination  of  the  light  regime  (option  1  on  a  code  of  conduct  or  2  on  light 
registration) with the transparency requirements would not be effective, as in the case of options 1 
and  2,  no  continuous  supervision  is  foreseen.  Absent  ongoing  supervision,  the  efficiency  of  the 
transparency requirements would be very limited. Option 1 (code of conduct) cannot be combined 
with continuous supervision, as codes of conduct are by nature voluntary. The positive impacts of 
the  voluntary  ESMA  Guidelines  on  CRAs  stem  from  the  fact  that  ESMA  Guidelines  supplement 
existing level 1 and level 2 legislation as well as from the fact that ESMA has a range of supervisory 
tools  in  relation  to  CRAs.  ESMA  Guidelines  are  part  of  a  comprehensive  legal  and  supervisory 
framework. A soft approach towards ESG rating providers, either in the form of a recommendation 
or guidelines could not have similar effect as ESMA Guidelines supplementing level 1 and level 2 
legislation. 

As for option 2 on regulatory treatment, it foresees requirements in relation to registration, including 
the enforcement of those requirements. We could have combined it with Option 1 on transparency, 
however, given the limited scope of the enforcement foreseen (only in relation to the requirements 
for  registration),  it  would  not  have  the  required  impact  since  it  would  not  be  subject  to  ongoing 

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supervision.  We  have  therefore  decided  not  to  present  such  an  option,  for  the  sake  of  avoiding 
repetitive arguments.  

We have added explanation that in order not to multiply the combination of options, we have not 
analysed those combinations that are clearly ineffective and would not have much impact. 

Question 3  

How is  coherence  between  dealing with  ESG factors  by  credit  rating  agencies  and  the  ESG 
ratings ensured? 

As explained in the Impact Assessment, credit ratings and ESG ratings play different roles and serve 
different purposes. Credit Ratings assess the risk of default of a company and should capture all the 
risks that may affect creditworthiness - including sustainability risks where relevant. Credit ratings 
are used by investors to calibrate portfolio risk profiles (including for investment products) as well 
as for the calculation of prudential requirements under the EU’s Capital Requirements Regulation 
(CRR) and Solvency II, and play an important role in ensuring financial stability. Credit ratings are 
also used by the European Central Bank as one element in its open market operations. 

ESG ratings have different purposes and usage. Some assess exposures to risk stemming from E, S 
and  G  factors,  others  impacts  of  the  entity  on  the  outside  world,  or  still  others  may  assess  the 
compliance with international standards. There are currently no regulatory requirements in relation 
to the use of ESG ratings (as opposed to credit ratings) and they only play a limited, indirect role for 
financial stability. Due to the different functions of those ratings, the same company may receive a 
good credit rating and a bad ESG rating, or vice versa. 

Credit Rating Agencies have been regulated since the financial crisis of 2008. They need to register 
with  ESMA  and  are  subject  to  a  number  of  organisational  requirements,  as  well  as  ongoing 
supervision by ESMA. The CRA Regulation has also introduced disclosure requirements in relation 
to methodologies and credit ratings as well as rating outlooks. 

The  initiative  on  ESG  ratings  follows  a  similar  but  lighter  approach  –  the  requirement  of  the 
registration/authorisation for providers of ESG ratings, supplemented by organisational requirement 
as  well  as  ongoing  supervision  by  ESMA,  and  the  introduction  of  transparency  requirements  in 
relation to methodologies. 

Given the less critical role ESG ratings play as regards financial stability, and given the fact that the 
market  is  still  growing  and  undergoing  changes,  the  Impact  Assessment  proposes  proportionate  - 
principle-based  -  organisational  requirements,  rather  than  prescriptive  requirements  specified  in 
delegated acts. 

In  order  to  ensure  transparency,  the  Impact  Assessment  proposes  to  develop  a  definition  of  ESG 
ratings  and  introduce  disclosure  requirements  in  relation  to  the  objectives  of  ESG  ratings  (ESG 
ratings are much more diversified as compared to credit ratings which are precisely defined), as well 
as in relation to methodologies. Given the different business model applied by the majority of ESG 
rating providers (subscriber pay model) as compared with the business model of CRAs (issuer pay 
model), the approach to the transparency of the product, i.e. rating, cannot be the same. Whereas the 

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CRA Regulation requires public disclosure of credit ratings, such a requirement cannot be introduced 
for ESG ratings that are provided for a fee to subscribers. 

Given the global role of ESG rating providers, similar to that played by credit rating agencies, and 
given  ESMA  experience  with  the  supervision  of  the  latter,  the  Impact  Assessment  proposes  the 
supervision to be carried out by the same authority, i.e. by ESMA. This would facilitate coherent 
supervision of both types of entities, credit rating agencies and ESG rating providers. 

Question 4  

What is the evidence underpinning the impact analysis?  

(1) 

Clarification of evidence used in the Impact Assessment 

We  have  gathered  a  significant  amount  of  evidence  from  different  sources,  including  a  Study 
commissioned by DG FISMA, a Commission consultation but also outreach activities and exchanges 
with stakeholders. ESMA also supported the Commission work via a call for evidence published in 
2022 and provided a mapping of ESG rating providers operating in the EU. We also analysed existing 
international  recommendations  and  codes  for  ESG  rating  providers,  such  as  the  IOSCO 
recommendations. 168 organisations and persons responded to the targeted consultation supporting 
this initiative, mainly investors, ESG rating providers and listed companies. 

In order to  understand better the problems  which this market  faces in  practice,  and following the 
targeted  consultation,  we  have  undertaken  a  significant  review  of  academic  literature232,  market 
analysis and outreach activities with a large number of key stakeholders in the ESG ratings market. 
We held  bilateral  meetings with  various stakeholders between April and  October 2022, including 
meetings with 14 different ESG rating providers, meetings with users or associations representing, 
amongst  others,  rating  users,  meetings  with  other  stakeholders  such  as  academics,  NGOs,  public 
bodies and supervisory authorities. 

We  have  carried  out  an  additional  review  and  streamlining  of  the  evidence  gathered  from  our 
research  and  outreach  activities,  and  we  have  included  additional  references  to  such  evidence 
throughout the Impact Assessment where necessary, including from ESMA’s mapping exercise 
and responses to the consultation, in particular in the impacts section. 

(2) 

Assessment of impacts 

The Impact Assessment aims to capture and assess the impacts stemming from both Level 1 and the 
introduction  of  delegated  acts  /  level  2  measures.  Level  2  measures  will  operationalise  the 
requirements relating to authorisation and transparency to the public. 

The Impact Assessment states that ESG ratings providers will be required to be authorised by ESMA 
in order to provide ESG ratings to European regulated financial institutions and companies within 
the  scope  of  the  CSRD  who  solicit  ESG  ratings.  The  key  requirements  for  authorisation  will  be 
specified in Level 1, which will be further operationalised by Level 2 measures to be developed by 
ESMA.  

232 See Section 2 on problem definition. 

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Since  Level  1 measures  will be principle-based and details  will only be set  at  Level  2 (regarding 
transparency and authorisation only), some of the cost figures are based on estimates or only indicate 
possible ranges. 

When developing recommendations for Level 2 measures, ESMA would be asked to further assess 
the impacts, including costs, in order to make these assessments more precise. The Commission will 
carefully monitor ESMA’s work.  

We  have  further  clarified  in  the  Impact  Assessment  that  an  additional  cost  assessment  for  the 
authorisation requirement will be done by ESMA when drafting the Level 2 measures. 

(3)  Main factors driving the costs 

In the Impact Assessment, two types of costs are analysed (1) related to authorisation and supervision 
and (2) related to transparency measures. Authorisation and supervision requirements are the main 
drivers of costs, accounting for about 90% of the costs of this initiative, while the costs of complying 
with transparency measures are expected to be significantly less burdensome for the sector.   

One-off costs estimated in the Impact Assessment are mostly related to authorisation for both smaller 
and larger ESG rating providers. Further one-off adjustment costs are likely to arise in relation to the 
need to upgrade IT systems and strengthen internal procedures, but estimates are difficult to obtain. 

In terms of supervisory fees, they would be borne primarily by large providers (around 94% of the 
total). Smaller entities would bear only about 5% of the costs of supervision for ESMA. In order to 
prevent  large  cost  impacts  on  smaller  providers,  the  rate  of  supervisory  fees  would  be  very 
progressive, ranging from 0.37% to 2.4% of annual revenue. 

(4)  Market growth and competition 

Recent years, even without any regulatory framework, have seen a consolidation of the ESG ratings 
market,  with  mostly  large  –  non-EU  -  players  acquiring  smaller  and  specialized  market  players. 
According to the Russell Investment 2020 survey, the three largest ESG rating and data providers 
globally  are  MSCI  ESG  Research  (42%  of  asset  managers  surveyed  subscribe  to  their  services), 
Sustainalytics (37%) and ISS-oekom (31%). Consolidation is to be expected for this type of market 
given its large economies of scale. 

Regulation will cause additional costs for ESG rating providers, but measures have been identified 
to  make  sure  that  they  are  proportionate  and  that  any  distorting  effect  will  be  limited.  We  held 
numerous  meetings  with  stakeholders  and  in  particular  smaller  ESG  rating  providers  to  discuss 
potential implications of the initiative on their activities. In the assessment of options and in Annex 
4 on the SME test, we are proposing a number of mitigating measures (transition period, adjustment 
of supervisory fees, proportionate supervision). Nevertheless, the costs of regulation could increase 
barriers to entry or have an additional effect on consolidation. 

At the same time effective regulation that ensures a high level of quality can also help competition. 
It avoids situations where one player may operate on the basis of lower costs or quality, can exploit 
the lack of transparency and still attract customers, while others invest a lot, resulting in an unlevel 
playing field. 

126 

 
 
And the introduction of a regulatory framework is expected to lead to reduced costs for investors. 
The lack of trust has led to investors additional spending on due diligence activities, checking the 
data from ESG rating providers and complementing these with in-house ESG ratings. Investors will 
be able to make better informed decisions as they will have more information on how ESG ratings 
are computed and what they measure. They will also have more confidence in the overall operations 
of ESG rating providers.  

We  have  added  further  evidence  from  responses  to  the  Commission  targeted  consultation  and 
exchanges with stakeholders as to how they expect the competition to evolve in the coming years. 

Changes introduced in the Impact Assessment: 

  Scale of the problems identified: we have provides for additional information and sources 
on the problems identified and how important they are for investors, for example ‘ratings that 
don’t  rate  -  the  subjective  world  of  ESG  ratings  agencies’,  ‘ESG  investing,  issues  and 
challenges’. The problem definition section already contains a large number of references to 
literature and other sources of information showing the significance of the problems.  

  Allocation of capital: we have added references to additional sources and literature providing 
information  on  the  use  of  ESG  ratings  and  on  how  important  they  are  for  professional 
investors in their investment decision making process and their implications for companies 
(e.g. survey conducted by Ninety One finding that 88% of investment professionals use third-
party ESG ratings as a part of their investment process, with 92% expecting to do so in the 
future).  

  Success of this initiative (monitoring): we have added further concrete KPIs and specified 
who  should  be  responsible  for  carrying  out  the  surveys  and  check  the  progress  in  the 
implementation of this framework. 

  Option combinations: we have emphasised and highlighted the key elements underlying the 
various  options.  We  will  also  add  that  we  have  pre-analysed  the  possibility  of  alternative 
combinations of the options on the regulatory treatment and the options on transparency to 
illustrate why we have decided to pursue our analysis only for the most feasible and impactful 
ones  and  combination  thereof,  which  allows  us  at  the  same  time  keeping  the  Impact 
Assessment as simple as possible.  

  Impacts: we will clarify that the analysis in the Impact Assessment aims to capture and assess 
the  impacts  stemming  from  both  Level  1  and  the  introduction  of  delegated  acts  /  level  2 

127 

 
 
 
 
 
 
 
 
measures. Level 2 measures, to be developed by ESMA, will operationalise the requirements 
relating to authorisation and transparency to the public and, at this stage, ESMA would be 
asked to further assess the impacts, including costs, to further narrow down the cost ranges 
provided in the IA. 

128