Long before the deadline in November, more than a hundred ESG rating firms have already requested approval from the ESMA (European Securities and Markets Authority) to operate in the European Union. According to the new regulatory framework - Regulation EU 2024/3005 - analysis and rating firms will be under the direct supervision of the European market regulator to try to ensure the transparency and integrity of the data.
And, most importantly, the new regulation prohibits the same entity from selling ESG ratings while simultaneously providing consultancy, auditing, or investment services. This will force large firms to reorganise their structures to separate consultancy and rating.
Applications to the ESMA can be of three types: Full authorisation, recognition regime (for agencies based in the US or UK seeking to market their ratings in the EU), and Simplified regime, designed for small specialised analysis firms.
On the list of applicants are, of course, all the major firms: MSCI ESG Research; Sustainalytics (Sprott/Morningstar); S&P Global Ratings Sustainable; Moody's ESG Solutions, Fitch Ratings (Sustainable Fitch) Bloomberg/Refinitiv (LSEG)... Also the firms of European origin: EthiFinance, Inbonis Rating, RepRisk or those specialised in impact assessment and supply chain: EcoVadis, ISSESG, CDP...
Agencies will be required to publicly break down the weightings of each criterion (E, S, and G), their data sources, and whether they measure financial risk for the company, the impact on society and the environment (double materiality), or both.
The new regulation aims to make inflated or inconsistent scores in sustainable investment funds more difficult, because unlike financial credit agencies - where Moody's and S&P usually agree - ESG firms assigned very different ratings to the same company due to the lack of standardised criteria.
