EU proposes new restructuring of ESG ratings agencies

The European Union proposed new rules on Tuesday, June 13, for firms selling environmental, social, and governance (ESG) ratings. These new rules could force some companies to restructure their businesses, marking a significant shift in the industry, as reported by Reuters.

S&P Global, Moody's, MSCI, and Morningstar's Sustainalytics are among the largest providers of ratings on companies' ESG performance, guiding billions of investment dollars. According to the EU's preliminary legislation, providers must cease offering consulting services to investors, selling credit ratings, and developing benchmarks, among other things, to avoid potential conflicts of interest.

These providers must obtain permission and be supervised by the European Securities and Markets Authority (ESMA). Violation of the new rules could result in a fine of up to 10% of their annual net turnover.

The new rules could lead agencies to split their businesses, although it is not yet clear what specific changes companies will need to make to be considered independent. Critics argue that ESG rating methodologies are too complex and opaque, and tend to reward companies that disclose more information, rather than those best able to manage ESG risks or limit the negative impact of their operations on the planet.