EU bolsters sustainable finance with strict regulations for ESG rating agencies

The EC has unveiled several measures, including regulations for ESG ratings providers and a fresh set of criteria for the EU Taxonomy of sustainable economic activities.

These steps are part of the Commission’s strategy to facilitate the capital flow needed to meet the EU’s sustainability goals, which include achieving a minimum 55% reduction in net greenhouse gas emissions by 2030 and attaining climate neutrality by 2050.

To realise the objectives of the European Green Deal, investments of around €700bn per year will be necessary, with private funding expected to provide the majority. The sustainable finance framework comprises key elements such as the EU Taxonomy, rules regarding disclosures and reporting for companies and investors, as well as standards and labels that support the creation of sustainable investment solutions and prevent greenwashing.

The ESG ratings sector has seen increasing calls for regulation, with concerns growing over the lack of oversight and transparency in this area. In response, the Commission’s new proposals mandate supervision of ESG ratings providers by ESMA to guarantee the quality and reliability of their services. The providers will be required to use methodologies that are “rigorous, systematic, objective and subject to validation.”

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