ESG Weekly Update – January 5, 2024

5 January 2024

EU: Council Agrees on Proposal for ESG Ratings Regulation

On December 20, 2023, the Council of the European Union agreed on its negotiating position for a new ESG ratings regulation. By regulating the ESG ratings industry, the proposal aims to improve the transparency, integrity, and comparability of methodologies and sources of information behind these ratings. The proposed regulation also targets potential conflicts of interest for ratings providers.

Under the Council’s proposal, an ESG rating would encompass an opinion and/or score related to environmental, social, and human rights or governance factors. The proposal would require ESG ratings providers operating in the EU to be authorized and supervised by the European Securities and Markets Authority, with a less intensive registration regime for smaller providers. Non-EU providers would need to obtain an equivalence decision, endorsement, or recognition in order to operate in the EU.

The European Commission initially proposed the regulation in June 2023, acknowledging the growing importance of ESG ratings in the operation of the EU sustainable finance market. The Council’s proposal, however, departed from the Commission’s view on conflicts of interest. More specifically, the Council’s position would not require legal separation between ratings providers and other business units, except consulting and audit services for rated entities, so long as specific measures to ensure autonomy and avoid conflicts of interest are implemented.

The Council and European Parliament are expected to begin negotiations on the regulation in January 2024.

Press Release
Council of the EU Negotiating Mandate (December 2023)
European Commission Proposal on ESG Rating Activities (June 2023)

UK: Government Plans to Launch Carbon Tax on Imported Goods by 2027

On December 18, 2023, the UK government announced plans to set up a carbon border adjustment mechanism (the “CBAM”) for certain products imported into the country. The CBAM will implement a carbon tax on imported products in the steel, iron, aluminum, ceramics, fertilizer, glass, and cement sectors.

Overseas producers will be charged a levy based on (i) the amount of carbon emitted in the production of the imported goods and (ii) the difference between the carbon price in the country of origin and the carbon price paid by UK producers. The CBAM aims to mitigate carbon leakage, namely where producers move manufacturing to countries with lower carbon prices, no carbon prices, or overall less stringent decarbonization policies. The CBAM will support domestic producers by ensuring that their prices are not undercut by foreign producers.

The CBAM is subject to consultation in 2024, with a proposed start date of 2027. Notably, the EU CBAM will start in 2026, a year earlier, which has raised concerns that emissions-intensive products may flood the UK in the interim.

Press release

Global: ICMA and IRSG Launch Voluntary Code of Conduct for ESG Ratings and Data Products Providers

On December 14, 2023, the International Capital Market Association (“ICMA”) and the International Regulatory Strategy Group (“IRSG”) published a voluntary code of conduct for ESG ratings and data products providers. The code aims to promote consistent global standards for such parties.

The code comes in response to increasing concerns over the transparency, quality, and reliability of ESG ratings and data products. The code has three key aims: (i) improve the availability and quality of information provided to investors at product and entity levels; (ii) enhance market integrity through increased transparency, good governance, and sound systems and controls; and (iii) improve competition through better comparability of products and providers.

Based on a series of recommendations made by the International Organization of Securities Commissions, the code is designed to be internationally interoperable by providing a consistent framework across jurisdictions. Recent developments in the EU, Japan, Hong Kong, and Singapore were considered when drafting the code.

ICMA press release