EU Council Adopts New ESG Ratings Regulation, Following UK's Recent Regulatory Push

The Council of the European Union has adopted a new regulation today to oversee Environmental, Social and Governance (ESG) rating activities, following a similar move by the UK government earlier this month to bring these influential metrics under regulatory supervision.

The EU regulation will require ESG rating providers to obtain authorization from the European Securities and Markets Authority (ESMA) and adhere to strict transparency requirements about their methodologies and information sources. This parallels the UK's recent draft legislation that would place ESG ratings providers under Financial Conduct Authority (FCA) oversight.

Under the new EU framework, providers established outside the Union must either secure endorsement from an EU-authorized provider, obtain recognition based on quantitative criteria, or be included in the EU registry through an equivalence decision. The regulation also mandates a separation of business activities to prevent conflicts of interest.

"ESG ratings have an increasingly important impact on capital markets and investor trust in sustainable investment products," the Council stated in its announcement. The new rules aim to strengthen the reliability and comparability of these ratings, which assess companies' and financial instruments' sustainability profiles.

The regulation will take effect 20 days after its publication in the EU's Official Journal, with an 18-month implementation period. This follows the European Commission's initial proposal from June 13, 2023, and represents the successful conclusion of negotiations between the Council and the European Parliament.

These coordinated regulatory developments in both the EU and UK mark a significant shift in the oversight of ESG ratings providers, reflecting growing recognition of their crucial role in sustainable finance decisions.

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