ESMA launches consultation on technical standards for ESG rating providers

In May, the European Securities and Markets Authority (ESMA) published a consultation paper on a set of three Regulatory Technical Standards (RTS), that will provide additional detail on how the EU intends to regulate ESG ratings providers, which in turn will impact how the ESG performance of companies and financial institutions is rated. Other jurisdictions, such as the UK, are also in the process of trying to more closely regulate ESG ratings providers.

ESMA’s proposals to improve transparency and comparability

The RTS will sit under the ‘Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities’ (the ESG Rating Regulation), which provides the overall regulatory framework for ESG ratings providers. ESMA has proposed three RTS in respect of:

1. Merging applications for authorisation and recognition
   
   ESG ratings providers established in the EU will be required to apply to ESMA for authorisation if they want to continue to operate. Providers established outside the EU must apply for recognition. Both types of application require similar information (for example, general information about the provider such as contact details, ownership structure, and expected market coverage). ESMA has proposed merging the processes into a single regulatory standard – the Authorisation and Recognition RTS. 
   
   By 2 August 2026, ESG rating providers that operate in the EU on and after 2 January 2025 (the date that the ESG Rating Regulation came into force) will need to notify ESMA if they intend to continue operating in the EU, and apply for authorisation or recognition.
    
2. Safeguarding against conflict of interest risks 
   
   To avoid conflicts of interest, the ESG Rating Regulation prohibits ESG rating providers from also providing certain other services, unless specific mitigation measures are put in place. The services include providing consultation services, credit ratings, benchmarking, investment services, auditing of financial statements and assurance of sustainability reporting, and certain activities relevant to credit institutions, insurers and reinsurers. The mitigation measures include ensuring each activity is exercised autonomously, that conflicts of interest in the decision-making process are avoided, and that employees involved in providing ratings do not also carry out the other services.
   
   The proposed Separation of Activities RTS provides more detail on what these mitigation measures would include. For example, it would introduce organisational and physical measures that apply to all the services mentioned, such as separating out working environments, and requiring employees involved in the rating process to attest to their non-involvement in other services. It would also introduce further measures specific to investment, credit, insurance and benchmarking services, and some additional measures that apply only to benchmarking.
    
3. Consolidating disclosure requirements 
   
   ESG rating providers are required to make disclosures to the public, users of ESG ratings, rating entities and users of rated items. Disclosures include the methodologies and assumptions used in ESG rating activities. Similar to the Authorisation and Recognition RTS, ESMA has proposed to merge the various disclosure requirements under one RTS – the Disclosure RTS.
   
   Consequently, when launching a new ESG rating product, ESG rating providers would need to make:

• Rating product disclosures: detailing the name of the rated item and whether the rating takes into account targets and objectives of international agreements, such as the Paris Agreement;
• General methodological disclosures: including the applicable methodology, relevant supporting models, key rating assumptions and risks and limitations of artificial intelligence used in the data collection and rating process;
• Disclosures about the limitations in data sources, methodologies and information: such as the potential lack of accuracy and use of assumptions and proxy reference points;
• Organisational disclosures: addressing the ESG rating provider’s group structure and the mitigation of actual and potential conflicts of interest;
• Specific methodological disclosures: concerning the collection of any non-public data; and
• Disclosures about the revision of data and methodologies: to address any stakeholder engagement and the process and frequency for revising the methodologies.

Next Steps  

The consultation is open until 20 June 2025 and ESMA expects to publish a Final Report in early Q4 2025. The draft RTS must then be finalised and submitted to the European Commission before 2 October 2025.