There has been a significant recent development in relation to environmental, social and governance (“ESG”) rating activities. The ESG Ratings Regulation (Regulation (EU) 2024/3005, the “ESG Ratings Regulation”) was published in the Official Journal of the European Union on 12 December 2024 and will apply from 2 July 2026.
Sustainable Finance
The area of sustainable finance is continuously growing and evolving. We have previously written about several other developments in this space. This includes commentary on the EU Green Bond Standard Regulation earlier this month, the Loan Market Association (the “LMA”) and the International Capital Market Association’s guidelines on sustainability-linked loans financing bonds in July 2024 and the LMA’s model provisions for green loans to be included in LMA-form facility agreements in November 2024.
As sustainable investing gains prominence globally, ESG ratings play an increasingly central role in the sustainable finance ecosystem. The ESG Ratings Regulation aims to increase transparency and confidence in sustainability-related information by introducing a mandatory framework for providers of ESG ratings. Until now, ESG rating activities were not subject to any EU-wide regulation, creating discrepancies in methodologies and risks of greenwashing.
Who should be interested in the ESG Ratings Regulation?
In-scope providers of ESG ratings will need to ensure compliance with the ESG Ratings Regulation. Various other stakeholders are indirectly impacted, including current and prospective issuers of financial instruments (including bonds) which rely to any extent on ESG ratings, as well as investors, arrangers and underwriters.
Key Definitions
From 2 July 2026, the ESG Ratings Regulation will apply to ESG ratings issued by ESG rating providers operating in the EU.
ESG ratings are defined widely as an opinion, score or combination of both regarding a rated item’s profile or characteristics with regard to environmental, social and human rights or governance factors, exposure to risks, or the impact on environmental, social and human rights or governance factors based on both an established methodology and a defined ranking system of rating categories, irrespective of whether such ESG rating is explicitly labelled as an “ESG rating”, “ESG opinion” or “ESG score”. The list of ESG ratings that are explicitly out of scope has been expanded substantially since the originally proposed exemptions due to input from relevant stakeholders, and includes private ESG ratings as well as certain types of Sustainable Finance Disclosure Regulation (SFDR) disclosures and / or EU Taxonomy disclosures.
An “ESG rating provider” is any legal person whose activities include the issuance, and the publication or distribution of, ESG ratings on a professional basis.
The concept of “operating in the Union” covers either (i) issuing and publishing ratings on the provider’s website or through other means or (ii) issuing and distributing ratings through subscription or other contractual relationships to certain entities, such as regulated financial undertakings in the EU, entities within the scope of the EU Accounting Directive or EU Transparency Directive, and certain EU bodies or public authorities in an EU member state. Providers established outside the EU will only be within scope where they engage in the activities referenced in (ii).
Authorisation and Supervision
Any legal person that wishes to operate as an ESG rating provider in the EU must obtain authorisation from the European Securities and Markets Authority (“ESMA”) if it is established in the EU. Once authorised, there are various governance, transparency, conflict of interest and methodology requirements that will apply, such as the obligation on the ESG rating provider to publish on its website prescribed information pertaining to the methodologies, models and key rating assumptions used.
Third-country ESG rating providers who wish to operate in the EU typically must (i) be authorised and supervised in that third country and (ii) benefit from an equivalence opinion in respect of that jurisdiction by ESMA. A non-EU entity will need to make a notification to ESMA and will be included on a specific ESMA register. There are also other routes to market for small non-EU ESG rating providers in the absence of an equivalence decision, involving the establishment of a legal representative in the EU and separately where an authorised EU ESG rating provider endorses the ratings of a third-country ESG rating provider in the same group.
To balance the regulatory burden on small ESG rating providers, the ESG Ratings Regulation introduces a lighter temporary regime for small ESG rating providers who meet the criteria of a small undertaking under the EU Accounting Directive. The lighter regime is optional and small ESG rating providers who opt in will only be subject to specific organisational and transparency requirements. The regime for small ESG rating providers is temporary and those who choose to opt in will be subject to the full ESG Ratings Regulation after three years.
Getting Ready
ESMA has significant powers of supervision in relation to compliance with the ESG Ratings Regulation, such as the power to carry out on-site inspections, withdraw or suspend the relevant provider’s authorisation, and issue public notices or impose fines. It is therefore incumbent on in-scope providers in Ireland and elsewhere to assess the potential impact of the ESG Ratings Regulation, including whether their current governance, transparency and methodology processes and procedures need to be updated.
We are continuing to keep a close eye on developments in this area and will publish further updates as matters progress. For further information on the ESG Ratings Regulation and sustainable finance more generally please contact William Foot, Alan Bunbury, Nicole Burke, David O’Mahony or your usual Matheson contact.
This article is provided for general information purposes only and does not purport to cover every aspect of the themes and subject matter discussed, nor is it intended to provide, and does not constitute or comprise, legal or any other advice on any particular matter.