Shaping sustainable finance: the European Economic and Social Committee’s blueprint for a regulation governing ESG ratings

The European Economic and Social Committee (EESC) has weighed in on the EU’s proposal to regulate environmental, social and governance (ESG) ratings. In an opinion adopted in October 2023, the EESC emphasises the need for quality standards to combat greenwashing and advocates the mandatory inclusion of the principle of double materiality. The definitions of “ESG ratings” and “ESG rating providers” need to be refined to exclude certain non-commercial activities from the regulation’s scope. Additionally, the Committee recommends establishing an EU sustainability agency.

ESG ratings are instrumental in assessing a company’s sustainability and responsible business practices, as well as the impact of environmental, social and governance factors on the company. In today’s investment landscape, these ratings guide capital allocation towards sustainable and responsible business practices, facilitating the shift towards a climate-neutral and more sustainable economy. 

EESC rapporteur Krzysztof Balon recognises the Commission’s proposal for a regulation as a landmark initiative set to significantly reshape the European ESG ratings sector. He stresses, In this opinion we underscore the need for rigorous standards, precise definitions, enhanced transparency and measures to avert conflicts of interest. These steps are pivotal in the pursuit of a climate-neutral economy and in bolstering public trust in financial markets.

Ensuring quality and preventing greenwashing

To prevent greenwashing and uphold the quality of ESG ratings, the EESC advocates introducing an authorisation process and organisational requirements for ESG rating providers. The Committee also recommends incorporating “double materiality” into these standards, mandating that companies report on both how sustainability issues affect their business and how their activities impact society and the environment. This approach is envisioned to promote dependable information and elevate standards through regulated competition among rating providers, explains EESC co-rapporteur Andrea Mone. 

Clarifying definitions

The EESC further proposes refining the definitions of “ESG ratings” and “ESG rating providers”. Non-commercial and non-profit ranking and evaluation activities carried out by environmental organisations, academics and journalists, which do not form a substantial portion of their overall work or serve as a primary source of income, should fall outside the scope of the regulation on ESG ratings.

Establishing an EU sustainability agency for reliable ratings

The creation of an EU sustainability agency is essential to address potential market gaps by offering ratings for SMEs, providers of services of general interest (SGIs) and social economy enterprises. Furthermore, this agency can play a crucial role in restoring public confidence in financial markets and instituting a mechanism for dispute resolution and complaint handling, as outlined in Article 18 of the Commission’s proposal for a regulation. Commencing the political process to create this agency is a priority for the EESC.