EU looks into the functioning of ESG rating market

The European Commission (EC) has launched a targeted consultation on the functioning of the market for ESG ratings in the European Union and on the inclusion of ESG factors in credit ratings. Depending on the lessons learned from the impact assessment, possible regulation is expected in the first quarter of 2023. The consultation is also very important for the real estate sector.

The targeted consultation on environmental, social and governance (ESG) ratings and on sustainability factors in ratings is an integral part of the renewed sustainable finance strategy adopted by the European Commission in July 2021. Both credit ratings and ESG ratings are opinions provided by specialised agencies and used by financial institutions and professional investors, the RICS said in a press release on 13 June.

Relevance of ESG

With the growing interest in ESG criteria, investors need a way to objectively assess a company's ESG performance. ESG ratings are intended to help investors identify and understand financially significant ESG risks to a company. Companies are rated based on publicly available information such as media sources and annual reports, providing scores for each material 'E', 'S' and 'G' subject, in addition to an overall score.
These unique scores are used by investors as a proxy for ESG performance. Companies that score well on ESG metrics are assumed to be better at anticipating future risks and opportunities, more inclined to think strategically in the longer term, and focused on long-term value creation.