New EU ESG Rules: What Companies and Investors Need to Know
Overview
The European Securities and Markets Authority (ESMA) has just released draft technical standards to regulate ESG rating providers under a new EU regulation on May 2nd. These rules aim to bring greater consistency, transparency, and accountability to a rapidly growing industry that influences trillions in investment decisions.
A Shift Toward Regulated ESG Ratings
ESG ratings have become a critical part of how investors assess companies' environmental, social, and governance performance. Yet until now, the firms producing these ratings have operated without a harmonized regulatory framework in the EU.
With the introduction of the EU ESG Ratings Regulation, ESMA is stepping in to create clear rules for how these providers operate. The goal is to increase trust in ESG data by ensuring that providers follow consistent standards, disclose their methodologies, and manage conflicts of interest.
The draft standards, published in late April 2025, are now open for public consultation. ESMA’s final rules are expected by the end of the year.
Who Will Be Affected
Any company offering ESG ratings in the EU will be subject to these new rules regardless of where they are based. ESG rating providers established in the EU must apply for either authorization or registration, depending on their structure and business model.
For providers outside the EU, there are three options to comply:
Operate under an equivalence regime if their home country’s regulations are deemed similar.
Use an endorsement model, where an EU entity endorses their ratings.
Establish a contractual relationship with an authorized EU affiliate.
This approach ensures that non-EU providers offering ratings in the EU are held to the same standards as their EU-based counterparts.
What the New Standards Require
ESMA's draft standards focus on four main areas: transparency, conflicts of interest, governance, and supervision.
ESG rating providers must clearly publish the methodologies they use. This includes explaining how different ESG factors are selected, measured, and weighted. Any changes to the methodology must be documented and communicated to users in a timely and structured way. The aim is to prevent sudden shifts in ratings without proper context or disclosure.
The rules place strong emphasis on identifying and mitigating conflicts of interest. Providers must separate their rating activities from commercial functions and other business areas that could create bias. Internal policies and controls will be needed to ensure independence.
Firms must strengthen their internal governance. ESMA is setting minimum requirements for staff involved in ESG rating activities, including specific functions for compliance, internal audit, and senior management accountability. One senior manager must take clear responsibility for ESG rating activities.
The draft standards address outsourcing. While providers can outsource certain functions, they remain fully responsible for the quality and compliance of outsourced work. Contracts must be in place to ensure third parties meet the same regulatory requirements.
Monitoring, Reporting, and ESMA’s Role
Under the new rules, ESG rating providers will need to submit regular reports to ESMA. These include detailed lists of rated entities and financial instruments, data on how ratings are distributed, and summaries of the methodologies applied.
In addition, providers must prepare annual compliance reports and maintain robust audit trails for their rating decisions. This will give ESMA the information it needs to supervise the market and enforce the rules where necessary.
ESMA will maintain a public registry of authorized and registered ESG rating providers, making it easier for investors to identify credible sources of ESG data.
What’s Next
The consultation period for the draft rules is open now until June 18, 2025. ESMA is actively seeking feedback from stakeholders, including rating providers, investors, corporates, and industry associations.
After reviewing responses, ESMA plans to finalize the technical standards by the end of 2025. The regulation will then move into implementation, with a phased timeline likely to give providers time to adapt.'
Why This Matters for Companies and Investors
For companies, these new standards will lead to more consistent evaluations and may reduce confusion caused by diverging ESG ratings. It could also raise the bar for transparency when interacting with ESG rating agencies.
For investors, the rules are designed to improve the comparability, reliability, and clarity of ESG scores. This is especially important in a market where ESG data is increasingly used for portfolio construction, risk assessment, and compliance with regulatory requirements like SFDR and the EU Taxonomy.
Smaller or niche rating providers may face challenges meeting the compliance burden, which could reshape the competitive landscape. Consolidation or increased partnerships between firms may follow.