ESG ratings: the EU Council approved the new regulation

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The EU Council approved the new regulation for Environmental, Social and Governance (ESG) rating activities. The regulation stipulates that ESG rating providers will have to be authorised by ESMA and will be subject to its supervision, while complying with transparency obligations, in particular regarding the methodology used and the sources of information. ESG rating providers outside the EU that intend to operate in the EU will have to obtain approval of their ratings from an authorised provider in the EU, based on quantitative criteria, or, be included in the register of EU ESG rating providers. The European Securities and Markets Authority (ESMA) had highlighted the lack of regulation of ESG ratings as a risk for investors in 2021. Since then, European institutions have been working on a strategy to improve their reliability.

ESMA (European Securities and Markets Authority) was created following the recommendations of the 2009 de Larosière Report, which proposed the establishment of a European System of Financial Supervision (ESFS) as a decentralised network. ESMA started operating on 1 January 2011, succeeding the Committee of European Securities Regulators (CESR), which was tasked with promoting consistent supervision in the EU and advising the European Commission. ESMA's objectives are to protect investors by improving responses to the needs of financial consumers and to strengthen their ability to make informed choices; to promote the integrity, transparency, efficiency and proper functioning of financial markets and related infrastructures; and to strengthen the financial system to ensure its resilience to shocks and its capacity to cope with imbalances.

The ESMA is committed to promoting supervisory convergence between the competent national authorities (ANC) of the Member States, not only in the area of financial instruments and capital, but also by cooperating with other European supervisory authorities in the banking (EBA) and insurance and occupational pensions (EIOPA) sectors. Despite being an independent authority, ESMA is accountable to the European institutions, including the European Parliament, to which it provides formal reports at the request of the Committee on Economic and Monetary Affairs (ECON), as well as to the Council of the European Union and the European Commission. ESMA focuses its efforts on three strategic priorities and two key themes outlined in the ESMA Strategy 2023-2028. The implementation of this strategy will take place gradually, taking into account market developments, emerging risks and new legal mandates, as well as the resources available to both ESMA and national competent authorities.

The new regulation also introduces the principle of separation of business activities to prevent conflicts of interest between those who support a company on its sustainability journey and those who are in charge of assessing the integration and impact of ESG (environmental, social and governance) issues<//a>. ESG ratings offer an assessment of the sustainability profile of a company or financial instrument by examining the impact it generates on society and the environment, as well as its exposure to risks related to sustainability issues. With the EU's regulatory move towards sustainability mainstreaming, these ratings are taking on an increasingly significant role in the functioning of capital markets and investor confidence in sustainable investment products, along with ESG reporting.

ESG reporting offers investors the opportunity to contribute to the well-being of people and the planet while generating long-term wealth. This tool allows investors to assess the risks associated with investments by analysing companies' ESG reports to understand their current environmental, social and governance performance. Such reports provide valuable information on companies' long-term strengths and weaknesses, facilitating ESG investment decisions. Companies that emphasise ESG issues tend to demonstrate resilience and sustainable growth, making them attractive choices for investors. For example, over the past decade, the S&P 500 ESG index has outperformed the traditional S&P 500 index in terms of annual returns. However, since ESG reporting is not yet standardised, it is crucial that investors check the reporting standards adopted by each company.

The model adopted by the EU is modelled on that of the UK and ESMA will be the authority in charge of overseeing its implementation, ensuring uniform standards for all providers operating in the EU. The new rules will enter into force 20 days after publication in the Official Journal of the EU and will apply 18 months later. In the context of environmental risks, there is the XNatura Platform by 3Bee Ecosystem, the first platform that enables municipalities, companies and nature parks to monitor their impacts and dependencies on nature and define a tailor-made climate strategy. All in line with international reporting standards, in full compliance with regulatory compliance. The XNatura Platform therefore aims to support the identification of areas most exposed to natural, climate and biodiversity risks and help in planning conservation and restoration of natural habitats.