In June The European Commission released a series of measures aimed at bolstering its sustainable finance framework, including a new proposal to regulate ESG ratings providers, and the introduction of a new set of criteria for sustainable economic activities under the EU Taxonomy. As part of the package announced on 13 June 2023, the European Commission published the draft text of a regulation on the transparency and integrity of ESG rating activities (ESG Rating Regulation). In this podcast, we investigate:
To gain additional insights about this subject, be sure to explore the other episodes of the CSRD series available on the Assurance in Action Podcast network.
Rowena Curtis Intertek 0:08
Hello and welcome to the third in our series of podcasts dedicated to the new EU Corporate Sustainability Reporting Directive, CSRD.
I'm Rowena Curtis, UK Marketing Manager for Intertek Business Assurance, and I'm joined by Catherine Beare, Regional director, Business Assurance UK and Iberia.
Catherine is going to give us an update on the recent European Commission's proposal related to the regulation of ESG ratings providers and what that means in relation to CSRD.
Catherine has been in the Sustainability world for 20 years, previously working with Business in the Community – the leading CSR not-for-profit helping companies implement and improve their internal CSR programmes.
During her 14 years at Intertek she has worked with all sectors, helping organisations deliver effective and risk managed responsible supply chains. Having worked globally, but with more of a focus on UK and EU, Catherine has grown Intertek’s Responsible Supply Chain programmes supporting regional expansion, bringing to market new innovative sustainability solutions and speaking at many subject matter focused events.
So Catherine, can you firstly explain to the audience what was actually announced in June and what does this mean?
Catherine Beare Intertek 1:22
Yes. Thanks Rowena. So the European Commission on the 13th of June released, you know, a whole series of measures aimed at bolstering its sustainable finance framework, including a new proposal to regulate ESG ratings providers and the introduction of a new set of criteria for sustainable economic activities under the EU Taxonomy.
Now this is part of the European Commission's renewed sustainable finance strategy launched back in July 2021. It was announced that the EC would develop proposals to regulate ESG ratings providers and as part of the package announced on the 13th of June, the European Commission published the draft text on a regulation on the transparency and integrity of the ESG rating activities.Now the sustainable finance framework is aimed at helping facilitate the flow of capital needed to finance the EU’s sustainability goals, including the very ambitions of the European Green Deal for things like reducing net greenhouse gas emissions by at least 55% by 2030 and achieving climate neutrality by 2050. The Commission estimates that achieving the objectives of the Green Deal will require investments of around €700 billion per year, with the bulk coming from private funding. No small amount.
Now the framework's key building blocks include the EU Taxonomy, rules on disclosures and reporting for companies and investors, and tools such as standards and labels, enabling the development of sustainable investment solutions and ultimately to avoid greenwashing.
Now calls to regulate the ESG rating sector have increased in recent years and ultimately, as investors increasingly integrate ESG considerations into investment process, yet the activities and businesses of the providers are generally not covered by markets and securities regulators, which is obviously where this has all come from.
Rowena Curtis Intertek 3:53
OK, so how do the changes look now?
Catherine Beare Intertek 3:58
And you know, not being a full expert on this, but having read into the detail what we're seeing here is that under the new proposals, ESG ratings providers will be supervised by ESMA. That's the European Securities and Markets Authority to ensure the quality and reliability of their services and the providers will be required to use methodologies that are rigorous and systematic, objective, and subject to validation, which are red up a lot more on the ESG today.
The proposals also include organizational requirements to prevent potential conflicts of interest and transparency rules regarding the methodologies, models and key rating assumptions underlying the providers ratings activities.
Now the EU Taxonomy is part of the EU Action Plan on Sustainable Finance. The taxonomy took effect in 2022, beginning with the first two climate objectives. Now the new criteria, introduced in June by the Commission, significantly expands the taxonomy to include the remaining objectives, which include sustainable use and protection of water and marine resources, for example, and other areas.
Rowena Curtis Intertek 5:22
Who does the ESG Rating Regulation apply to?
Catherine Beare Intertek 5:27
So the draft text and states that it applies to “ESG ratings issued by ESG rating providers operating in the Union that are disclosed publicly or that are distributed to regulated financial undertakings in the Union under NFRD or public authorities.” So actually quite broad and I guess more importantly, Article 2(2) and it states and sets like the EU regulations does not apply to so. This includes a number of organizations, just to name a few, and it doesn't apply to private ESG ratings, which are not intended for public disclosures or for distribution products or services that incorporate an element of an ESG rating; 2nd party opinions on sustainability bonds;
ESG ratings produced by Member States, public authorities or central banks subject to certain conditions.
Rowena Curtis Intertek 6:39
And are there any obligations on the users of ESG Ratings?
Catherine Beare Intertek 6:53
No essentially, there's no equivalent to what is referred to as the EU BMR Article 28 obligations on users of benchmarks, which is ultimately good news for the industry now. Users and rated entities will be provided with certain information about the ESG rating provider through the disclosure requirements. It must satisfy both in terms of its activities and its methodologies; however, there are no other considerations for users other than to ensure that the ESG ratings they are using are being provided by an appropriately authorized firm.
Rowena Curtis Intertek 7:31
So what does any of this mean in relation to CSRD?
Catherine Beare Intertek 7:35
Yeah, good question. So you know, It alternately does this link with CSRD and is really bad to the point on the data which is now going to be captured at a corporate company level which is going to be key. So the data that will get reported and verified in the CSRD reports will be key in ensuring the validity of this data. And you know if I could try to help you visualize this, I could give you like a top line summary as to how this is hard links into the wider regulation and policies and, you know, just sort of close your eyes and try and imagine the following.
So at the top of your chart, you're going to have the European Green Deal and from there next down you go to the financing of the Green Deal. Within financing, you have the following three areas: 1) You've got InvestEU, 2) you've got European Green Deal investment plan and 3) you've got facilitate private investment.
OK. So if we think back to that comment I made about the €700 billion mostly coming from private. So within the facility private investment section you have the following three areas: 1) sustainable finance disclosure regulations, 2) non-Financial Reporting Directive which, we know, is going to be replaced on the 1st of January 2024 by CSRD and you have 3) EU Taxonomy which is a requirement of CSRD.
So just to set that again, the facilitate private investment section, which is underneath the financing of the Green Deal, there's three areas: sustainable finance, disclosure regulations, ultimately CSRD and the EU Taxonomy which links and flows circularly into CSRD.
So ultimately it's starting to all come together and provide a very abused approach to a scathing, eventually to the requirements against the European Green Deal.
So that's how I see authority. You know, sort of links into all of this and this is why it's extremely important that the ESG ratings providers are gonna be mandated correctly so that any investments that have been undertaken are being made in a thorough and validated way.
Rowena Curtis Intertek 10:23
Thank you very much, Catherine, for explaining about what the June announcement from the European Commission meant on ESG ratings agencies.
So as a reminder on how Intertek can help on CSRD: to understand your current CSRD readiness, we can help you undertake a gap analysis to ensure you have a clear view of your organization's current readiness. And we'll work with you to find a clear action plan to address any gaps to prepare you for your first submission.
Through Training to ensure everyone understands what what's required to pay for your submission. This can be delivered to a range of different teams and functions across your organization, and the training will be bespoke to best fit your requirements.
We can also provide Auditing Solutions and in some markets, we can act as the auditor of your CSR Directive reports as one single provider supporting you from your early preparations through to audit of submission.
And finally, we've also partnered with ESG Playbook, a leading SaaS reporting solution provider, bringing in one tool all required data collection, aggregation and tracking and reporting for ESG.
For more information, please visit www.intertek.com/assurance/eu-csrd/
So this concludes today's podcast. Thank you very much for listening, and please watch out for further CSRD episodes to help with your journey to compliance.