The European Parliament’s Committee on Economic and Monetary Affairs (ECON) adopted by a large majority (33 in favour, 1 against, 3 abstentions), on Monday 4 December, its negotiating position on the draft regulation governing the transparency of rating agencies with regard to environmental, social and governance (ESG) criteria (see EUROPE 13288/17).
“The European Union must be the first power to adopt regulations in this area” and ensure “that ‘ESG’ criteria are truly tools at the service of the green and social transition”, said Aurore Lalucq (S&D, French), the rapporteur on this dossier, in a press release.
In the vote, the parliamentary committee approved all the compromise amendments negotiated between the political groups.
According to the text approved by MEPs, the future European rules will require ESG rating agencies to obtain authorisation from the European Securities and Markets Authority (ESMA), which must respond to a request for authorisation within 90 working days of the request. Annex I lists the information ESMA needs to make its decision, including the methodology used to issue an ESG rating.
ESG ratings issued by agencies established in a third country may be used by investors established in the EU once the European Commission has adopted an equivalence decision between the prudential frameworks in force in the EU and that third country.
On behalf of the EPP group, Spain’s José Manuel García-Margallo welcomed the fact that the future regulation provides for an equivalence mechanism for rating systems inside and outside the EU. He welcomed the fact that “third country rating agencies will be able to apply for recognition in the EU regardless of their level of turnover”, as the €12 million threshold has been eliminated.
The ratings issued by the ESG rating agencies should not constitute an average rating that synthesises environmental, social and governance criteria. This would have been “a major mistake”, according to Ms Lalucq, who believes that establishing an average would allow oil companies, for example, to be rated highly for good performance on social or governance criteria.
However, this does not mean that ESG ratings issued in aggregate form will be banned. However, the rating agencies that issue them will have to indicate the weighting in % of the three criteria E, S or G and give reasons for the weighting method used. And they should indicate whether the rating takes into account, among other things: - alignment with the objectives of the Paris Agreement for environmental criterion (E); - compliance with International Labour Organization conventions on social criteria (S); - alignment with international standards on tax evasion and avoidance for the governance criterion (G).
MEPs also insist on the independence of those responsible for issuing ESG ratings and of the managers of rating agencies vis-à-vis the entities (e.g. a ban on investing in products and services provided by rated entities). In particular, appropriate measures will have to be put in place to prevent conflicts of interest within credit rating agencies that provide banking, insurance and investment services.
The legislative proposal also aims to increase competition on the ESG rating agency markets. To try to prevent the market from being dominated by a handful of large entities, MEPs are calling for a European investor, when using at least two ESG ratings, to consider the possibility of choosing at least one supplier that holds less than 15% of the market – and not less than 5%, as previously envisaged.
To this end, ESMA will have to publish an annual list of ESG rating agencies authorised in the EU, indicating their market share in the EU.
Finally, MEPs insist on a ‘double materiality’ approach, so that an ESG rating identifies both the financial risk of investing in a rated entity and the risk that the rated entity poses to the environment and society in general.
To see the compromise amendments put to the vote by MEPs: https://aeur.eu/f/9x9 (Original version in French by Mathieu Bion with Anne Damiani)