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(1) On 25 September 2015, the UN General Assembly adopted a new global sustainable development framework, the 2030 Agenda for Sustainable Development (the ‘2030 Agenda’), having at its core the Sustainable Development Goals (SDGs). The Commission’s Communication of 22 November 2016 entitled ‘Next steps for a sustainable European future: European action for sustainability’ links the SDGs to the Union policy framework to ensure that all Union actions and policy initiatives, both within the Union and globally, take the SDGs on board at the outset. The European Council conclusions of 22 and 23 June 2017 confirmed the commitment of the Union and the Member States to the implementation of the 2030 Agenda in a full, coherent, comprehensive, integrated and effective manner and in close cooperation with partners and other stakeholders. In addition, the UN-supported Principles for Responsible Investment has, at the time of adoption of this Regulation, more than 5 300 signatories representing over EUR 120 trillion of assets under management. On 11 December 2019, the Commission published its communication entitled ‘The European Green Deal’ (the ‘European Green Deal’). On 30 June 2021, the European Climate Law was adopted as Regulation (EU) 2021/1119 of the European Parliament and of the Council , which enshrines in Union law the goal set out in the European Green Deal of Union economy and society becoming climate-neutral by 2050.

(2) The transition to a sustainable economy is key to ensuring the long-term competitiveness and sustainability of the Union economy and the quality of life of citizens in the Union, and to keeping global warming well below the 1,5 degree Celsius threshold. Sustainability has long been at the heart of Union policies and both the Treaty on European Union and the Treaty on the Functioning of the European Union (TFEU) recognise its social and environmental dimensions.

(3) Achieving the objectives of the SDGs in the Union requires the channelling of capital flows towards sustainable investments. It is necessary to fully exploit the potential of the internal market for the achievement of those objectives. In that context, it is crucial to remove obstacles to the efficient movement of capital towards sustainable investments in the internal market, to prevent such obstacles from emerging, and to set rules and standards to, on the one hand, promote sustainable finance and, on the other, disincentivise investments that can adversely impact the achievement of the objectives of the SDGs.

(4) The Union’s approach to sustainable and inclusive growth is anchored in the 20 principles of the European Pillar of Social Rights, as laid down in the Commission’s Communication of 26 April 2017 entitled ‘Establishing a European Pillar of Social Rights’, which aim to ensure a fair transition towards such growth and to ensure policies which leave no one behind. Furthermore, the Union social acquis, including the Union of Equality Strategies, provides standards in the areas of labour law, equality, accessibility, health and safety at work, and anti-discrimination.

(5) Financial markets play a crucial role in the channelling of capital towards investments that are necessary for the achievement of the Union climate and environmental objectives. In its communication of 8 March 2018, the Commission published its Action Plan on Financing Sustainable Growth, launching its strategy on sustainable finance. The objectives of that Action Plan are to mainstream sustainability factors into risk management and reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth.

(6) As part of the Action Plan on Financing Sustainable Growth, in 2021 the Commission commissioned a study entitled ‘Study on Sustainability-Related Ratings, Data and Research’ to take stock of the developments in the sustainability-related products and services market, identify the main market participants and highlight potential shortcomings. That study provided an inventory and classification of market actors, sustainability products and services available in the market and an analysis of the use and perceived quality of sustainability-related products and services by market participants. The study highlighted the existence of conflicts of interest, the lack of transparency and accuracy of environmental, social and governance (ESG) ratings methodologies and the lack of clarity over the terminology and the operations of ESG rating providers.

(7) In the framework of the European Green Deal, the Commission put forward an updated sustainable finance strategy, which was adopted in its communication of 6 July 2021 entitled ‘Strategy for Financing the Transition to a Sustainable Economy’.

(8) As a follow-up, the Commission announced in that strategy a public consultation on ESG ratings to feed into an impact assessment. In the public consultation that took place in 2022, stakeholders confirmed concerns regarding the lack of transparency of ESG rating methodologies and objectives and clarity over ESG rating activities. As trust is pivotal in the functioning of financial markets, such lack of transparency and reliability of ESG ratings should be urgently addressed.

(9) At international level, the International Organization of Securities Commissions (IOSCO) issued a report in November 2021 containing a set of recommendations on ESG ratings and data product providers. The Commission and the European Supervisory Authority (European Securities and Markets Authority) (ESMA) established by Regulation (EU) No 1095/2010 of the European Parliament and of the Council should consider the application of those IOSCO recommendations when assessing the compliance of a third-country jurisdiction or ESG rating provider with the requirements of this Regulation for the purpose of equivalence, endorsement or recognition.

(10) ESG ratings play an important role in global capital markets, as investors, borrowers and issuers increasingly use ESG ratings as part of the process of making informed decisions relating to sustainable investment and financing. Credit institutions, investment firms, insurance undertakings, assurance undertakings and reinsurance undertakings, amongst others, often use ESG ratings as a reference for the sustainability performance or the sustainability risks and opportunities in their investment activity. Consequently, ESG ratings have a significant impact on the operation of markets and on the trust and confidence of investors and consumers. To ensure that ESG ratings used in the Union are independent, comparable where possible, impartial, systematic and of adequate quality, it is important that ESG rating activities are conducted in accordance with the principles of integrity, transparency, responsibility and good governance, while contributing to the sustainable finance agenda of the Union. Better comparability and increased reliability of ESG ratings would enhance the efficiency of that fast-growing market, thereby facilitating progress towards the objectives of the European Green Deal.

(11) ESG ratings play an enabling role for the proper functioning of the Union sustainable finance market by providing investors and financial institutions with important information for their investment strategies, risk management and disclosure obligations. It is therefore necessary to ensure that ESG ratings provide material decision-useful information to users of ESG ratings, and that users of ESG ratings better understand the objectives pursued by ESG ratings and the specific issues and metrics measured by such ratings.

(12) It is necessary to acknowledge the various business models of the ESG rating market. A first business model is the user-paid model, where users of ESG ratings are mainly investors that purchase ESG ratings for the purpose of making investment decisions. A second business model is the issuer-paid model, where undertakings purchase ESG ratings for the purpose of assessing risks and opportunities within their operations. In order to ensure greater reliability of ESG ratings provided in the Union, rated items or, in the case of a financial instrument or a financial product, issuers of rated items should have the possibility of verifying the data used by an ESG rating provider and of highlighting any factual errors in the dataset used that could potentially impact the quality of future ratings. To that end, a rated item or an issuer of a rated item should be able to access, upon request, the dataset used to issue the ESG rating. The possibility of verifying that dataset should be a pure fact-checking tool and rated items or issuers of rated items should under no circumstances be able to influence in any manner the rating methodologies or rating outcome. The requirement for an ESG rating provider to notify the rated item or the issuer of a rated item before the issuance of the ESG rating should only apply before the first issuance of the rating and not to any following updates. That requirement serves as a means to inform the rated item or the issuer of a rated item that it is going to be rated by the ESG rating provider.

(13) Member States neither regulate nor supervise the activities of ESG rating providers or the conditions for the provision of ESG ratings. Given the existing divergences, lack of transparency and absence of common rules, it is likely that Member States would adopt diverging measures and approaches impeding alignment with the objectives of the SDGs and the European Green Deal. Those diverging measures and approaches would have a direct negative impact on, and create obstacles to, the proper functioning of the internal market and be detrimental to the ESG rating market. ESG rating providers issuing ESG ratings for the use of financial institutions and undertakings in the Union would be subject to different rules in different Member States. Divergent standards and market practices would make it difficult to have clarity over the construction of ESG ratings and to compare them, thus creating uneven market conditions for users of ESG ratings. That would cause additional barriers within the internal market and would risk distorting investment decisions.

(14) This Regulation complements existing Union legal acts in the field of sustainable finance and aims to facilitate information flows in order to facilitate investment decisions.