EU institutions edge towards agreement on ESG ratings regulation

Progress made in trilogue discussions especially on smaller provider regime, but disputes remain on disaggregation and conflicts of interest.

The Council of the EU and European Parliament have edged closer to agreeing on proposed regulation of ESG ratings in the first trilogue negotiations, as they race to complete discussions before the end of February.

Responsible Investor has seen a copy of a flash note put out by the Belgian presidency of the council, which describes positions taken in the negotiations.

The note says discussions were “cordial and efficient” and that negotiating parties mentioned the need to reach an agreement during this parliament. Progress was made in a number of areas, with support converging on measures to ensure smaller ESG ratings providers could be competitive under the regulation.

The parties are working to a tight deadline in order for the regulation to be put in place before EU parliamentary elections in June.

The European Parliament has proposed requiring buyers of ratings from multiple providers to “consider” appointing a firm with a market share of less than 15 percent. The council had suggested that smaller firms could be exempt from aspects of the regime.

According to the note, the parliamentary rapporteur, French MEP Aurore Lalucq, “expressed her sympathy” towards the council’s proposals, while the European Commission backed the non-binding nature of the parliament’s proposal.

However, there was some disagreement over the scope of exemptions. The Belgian presidency cautioned that exemptions should be limited to small firms, given that most providers in the EU market are small and medium-sized.

They faced opposition from both the commission and parliament, which argued that the automatic granting of an exemption could be an issue. The commission went so far as to say that the wording around automatic exemption was “problematic and unprecedented”.

The rapporteur said parliament could be willing to adjust the scope of the proposed exemptions but also had concerns about the “automaticity” of them.

While the Belgian note was keen to emphasise “a strong alignment of objectives” between the council, parliament and commission, there were disagreements between the council and parliament on a number of key areas.

The negotiators agreed to downgrade the entire section relating to governance to a “technical” discussion, which typically takes place separately from the high-level political negotiations.

This includes controversial rules on managing conflicts of interest, which had already been watered down from the initial commission proposal, and complaint mechanisms.

Another point of disagreements was parliament’s proposal that providers be required to disaggregate the E, S and G sections of ratings.

The participants agreed that there should be maximum transparency without interfering with the actual methodologies of ratings. However, the Belgian presidency warned that transparency rules which were too detailed could lead to “implicit” interference in methodologies.

The Belgians made it clear that interference with methodologies was a red line for member states – the only time that phrase was used in the note – while the parliament rapporteur refused to back down on disaggregation.

A spokesperson for the Belgian presidency said it did not comment on leaked documents.