The European Union is preparing far-reaching changes in the area of ESG ratings. The rules are intended to create more transparency, to enable investors to make reliable investment decisions. The reforms come at a time when the market for sustainable financial products is increasingly coming under scrutiny.

With the Regulation on ESG rating activities, the EU has taken an important step towards promoting comparability in ESG scores and opinions. In future, ESG rating providers established in the EU must be authorised and supervised by the European Securities and Markets Authority (ESMA). The rules require providers to disclose their methodologies and sources of information, and at the same time, to separate business areas to avoid conflicts of interest. Although the regulation will not come into force until 2026, ratings providers are already making preparations.

Luisa Dany, Associate at law firm Mayer Brown emphasises that "ESG ratings play a crucial role in enabling investors to make reliable and correct investment decisions.“ She also points out that the regulation gives issuers „tools to identify and correct errors in ESG ratings in a timely manner“.

She points out that though the ESG rating activities regulation should bring order to the market, "until all providers have adapted their methods, uncertainty will remain“. The prospectus regulation might also make ESG ratings mandatory, which could cause concern among issuers as they do not want to take responsibility for unregulated ratings.

One major problem is the lack of comparability of ratings due to very different methodologies used by providers. The provider ISS Stoxx, a subsidiary of Deutsche Börse, addresses this issue. „The comparability of ESG ratings is due to the underlying methodologies, which are by definition diverse, as the methodologies take into account the different research and analysis needs of investors. This diversity gives investors the choice and freedom to use ESG ratings and the underlying research as they see fit,“ said a spokesperson. This shows that the diversity of rating methodologies can also be seen as an opportunity.

The deadlines of the new regulation – seen as ambitious – are putting stakeholders under pressure. From summer 2026, ESG rating providers must fulfil all requirements in order to continue operating in the EU. In the meantime, the agencies face the challenge of adapting existing methodologies. The aim remains to optimise the flow of data. Disclosure requirements should make it easier for both issuers and investors to access relevant data.

In addition to the regulatory changes, the paradigm shift in the financial sector is also playing a key role. Sustainable financial products have long been more than just a trend. Nevertheless, Dany warns that „Regulation is growing, the requirements are increasing – but real sustainability needs more than just new rules.“

This differentiation is also visible in the products, such as green bonds and social bonds. „Green bonds and social bonds are and remain promising – but increasing qualitative differentiation would further raise the level of ambition," she says.

The background to the ESG rating activities reform shows that the EU is endeavouring to steer capital flows towards sustainability in a targeted manner, and thus make a contribution to achieving the Paris climate targets. However, without uniform standards, sustainable investments would ultimately remain a matter of trust. In recent years, many rating agencies have already made internal adjustments to separate ESG and credit analyses.