When is an Asset Manager an ESG Ratings Provider?

ESG Investor

Lewis Saffin, Associate at Herbert Smith Freehills, highlights the key takeaways for asset managers from incoming ESG rating regulation in Europe.

Having the support of the European Council and the responsible European Parliament committee, the final compromise text in relation to a regulation on ESG rating activities (the regulation) is expected to start applying 18 months after its entry into force following formal approval and publication. Once live, the regulation will represent the first compulsory rules governing ESG rating activities in Europe.

ESG rating providers are the primary focus of the proposed regulation. However, alternative investment fund managers, UCITS management companies and portfolio managers which use ESG ratings for their products and services carried out in or marketed into the EU (collectively, asset managers) may be in scope if they procure these ratings from third parties or generate them using proprietary ESG methodology.

Asset managers should consider:

whether they are subject to regulatory obligations as an ‘ESG rating provider’ for the purposes of the regulation; and whether they are subject to disclosure obligations as the provider or user of ESG ratings. Can an asset manager be an ‘ESG rating provider’?

The regulation defines an ESG rating provider as “a legal person whose occupation includes the issuance and publication or distribution of ESG ratings on a professional basis”.

ESG ratings are broadly defined and could potentially include any sort of ESG scoring system.

As such, any asset manager which uses a proprietary methodology to generate ESG scores would potentially be issuing ESG ratings and fall within the definition of an ‘ESG rating provider’. However, there are certain exemptions from the substantive licensing, organisational and methodological obligations for ESG rating providers which could be availed of by asset managers.

Relevant exemptions for asset managers

The main carve-outs from the regulation which will be relevant to asset managers relate to:

private ESG ratings which are “not intended for public disclosure or for distribution”; ESG ratings issued by regulated financial undertakings that are used exclusively for internal purposes or for providing in-house or intragroup financial services or products; and disclosures mandated by certain provisions within Regulation (EU) 2019/2088 (the Sustainable Finance Disclosure Regulation; SFDR) and Regulation (EU) 2020/852 (Taxonomy Regulation).

Moreover, where an asset manager issues an ESG rating which is both (i) incorporated in a product or a service which is already regulated under EU law; and (ii) disclosed to

The full article is available here. This article was published at ESG Investor.