EU Agrees its first ever rules for ESG rates

The recent agreement reached by EU states and the European Parliament to regulate ESG ratings represents a pivotal advancement in promoting transparency and accountability within the sustainability sector. This landmark set of rules marks the EU's first initiative to systematically regulate the assessment of company sustainability credentials, a critical development given the substantial global investments influenced by these ratings.

The introduction of stringent requirements for ESG ratings providers to obtain authorization and undergo supervision by the European Securities and Markets Authority signifies a proactive effort to combat 'greenwashing'. This practice, wherein companies may overstate their sustainability efforts, poses a significant challenge to achieving genuine environmental, social, and governance (ESG) goals. The regulation extends to rates outside the EU, who must now have their ratings endorsed by an EU-regulated entity, ensuring a standardized approach to sustainability evaluation across borders.

A key aspect of the new rules is the emphasis on "double materiality", focusing on the mutual impact between a company and its environmental and social surroundings, rather than solely on financial implications. This approach aligns with RICS's commitment to holistic sustainability assessments, considering factors such as human rights alongside environmental impacts.

The requirement for rates to delineate environmental, social, and governance factors, and to explicitly outline the weighting in composite ESG ratings, introduces a level of clarity and detail that RICS views as beneficial for all stakeholders involved in sustainable finance. This includes the specific consideration of a company's alignment with the Paris Agreement on carbon emissions reduction, a critical element in the global fight against climate change.

Furthermore, the provision allowing smaller EU-based ESG rates a lighter regulatory framework initially is a positive step towards fostering diversity and competition in a field currently dominated by a few large entities. This could encourage innovation and broaden the range of perspectives within the ESG rating sector.

As the EU moves towards formal adoption of these rules, expected to take effect in 2025, RICS acknowledges this development as a historic breakthrough for sustainable finance. It highlights a shared commitment to enhancing the robustness and reliability of ESG assessments—a cornerstone for the transition towards a more sustainable and socially responsible future.

In contrast, Britain's proposal for a voluntary code of conduct for ESG rates, while a step in the right direction, underscores the EU's more assertive stance in establishing a regulatory framework. RICS advocates for a harmonized global approach to ESG rating regulation, emphasizing the importance of mandatory standards to ensure the integrity and effectiveness of sustainability assessments in driving positive change.

For more information, please contact Fausta Todhe, EU Public Affairs Manager, at ftodhe@rics.org.