On May 2, 2025, the European Securities and Markets Authority (ESMA) published a Consultation Paper on draft Regulatory Technical Standards (RTS) under the ESG Rating Regulation, soliciting opinions from market participants. The consultation period will end on June 20, 2025.

In November 2024, the European Union officially released the "Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities" (EU2024/3005) (referred to as "ESGRR"), which is an important achievement following the 2018 "Sustainable Finance Action Plan", the 2021 "Sustainable Economic Transformation Strategy" and the 2022 EU targeted consultation on the ESG rating market. It aims to implement unified supervision of ESG rating providers, enhance the credibility and comparability of ESG ratings, and support the EU's sustainable finance agenda.

The consultation document contains the following:

• Application for authorization and recognition of ESG rating providers ("Authorization and Recognition RTS");
• What measures and safeguards should be taken to mitigate conflicts of interest when the ESG rating business is separated from activities other than ESG rating ("Business Separation RTS");
• Information that ESG rating providers should disclose to the public, rating projects, issuers and ESG rating users ("Disclosure RTS").

1. Authorization and Recognition RTS

To avoid duplication of work, ESMA will merge the processes for applying for "authorization" (Articles 6-8) within the EU and "recognition" (Article 12) by foreign entities into one set of RTS. All applications must be in a machine-readable format, with a unique number and a statement of integrity of senior management, and submit information including but not limited to:

• Organizational and equity structure, legal representative information and Legal Entity Identifier(LEI);
• Size and years of experience of senior management and rating analyst team;
• Types of rating products to be provided and market coverage;
• Rating methodology, model framework, review and update procedures;
• Conflict of interest policy and outsourcing arrangements;
• Financial statements and audit certificates for the past three years (exclusive for overseas entities);
• CSV format file for the rating list to be distributed, and contact information of third-country regulators (if applicable).

2. Business Separation RTS

Based on Article 16 of the ESGRR, ESG rating providers shall not, in principle, carry out consulting, credit rating, audit, investment, banking and insurance and benchmark services at the same time under the same legal person. If there are exceptions according to the law, investment, insurance or benchmark services can be provided, but conflict prevention must be implemented:

• Organizational and physical isolation: Establish an "information wall", independent organizational structure, office space and reporting line, and self-declare that relevant personnel do not concurrently hold prohibited or restricted businesses;
• Technical and internal control measures: For investment and insurance businesses, network segmentation and permission control, data watermarking and classification, confidential information management, regular training, contract compliance clauses and communication monitoring are required, and self-assessment reports are approved by management every 12 months;
• Additional salary isolation and conflict assessment: For benchmark services, salary performance arrangements are further required to be isolated from rating activities, and rating product design must not mechanically rely on benchmark outputs, and written conflict assessments must be completed and records retained before signing.

(Image source: Consultation Paper-Technical Standards under the Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities)

3. Information Disclosure RTS

Disclosure to the Public

• Set up a column on the official website to simultaneously disclose the methodology, model, key assumptions and information listed in Part I of Appendix III, such as method name, assumption list, data lag, model update mechanism, industry classification, scientific basis, AI risk, organizational structure and fee model, at the latest when the rating is first released;
• It is recommended to unify the disclosure order and directory style to facilitate investors to compare horizontally.

Disclosure to Users and Issuers

• Provide the information in Part II of Appendix III to rating users, rated entities and their issuers when the rating is first released;
• Users must attach a link to the public disclosure information when forwarding the rating to ensure complete information transmission;
• RTS does not add new disclosure elements beyond the provisions of Level 1, but only refines the display method, order and format.

Solicitation of opinions and subsequent process

• Solicitation of opinions: Submitted before June 20, 2025.
• Final report: Published in the fourth quarter of 2025.
• Technical standards submission: Submitted to the European Commission before October 2, 2025.
• Implementation of the regulations: Existing ESG rating agencies must notify ESMA whether they will continue to operate before August 2, 2026, and complete registration before November 2, 2026.

Editor's note:

ESMA's draft RTS will help improve the transparency and comparability of the ESG rating market by reducing the burden on small providers through the merger process and the principle of proportionality while ensuring regulatory consistency, but it will also impose higher requirements on the compliance and internal control of rating agencies. Institutions need to adjust their IT systems, revise conflict policies, improve information disclosure templates, and increase training and audit investment in the short term; at the same time, a unified disclosure format and sequence will facilitate investors to make horizontal comparisons and accelerate the process of ESG data standardization, which is of great significance to promoting the healthy development of the market.

Author：Qinger