Some members of the European Parliament are pushing for a stronger inclusion of the double materiality concept in the regulation of ESG ratings.

Earlier this month Aurore Lalucq, the lead on the ESG ratings regulation in the Parliament’s ECON Committee, said the objectives of ESG ratings providers needed to be clarified, as analysts “too often limit themselves to assessing financial materiality”.

“But a complete and relevant evaluation cannot spare analysing the consequences of the company’s activity on the rest of society,” she wrote in a report on her position.

She proposed an amendment to the Commission’s proposal that would require providers to issue “a clear warning about the limitations of the methodology and the conclusions that can be drawn from that rating”.

More recently, the so-called shadow rapporteurs in ECON have proposed their own amendments, with some of these making a stronger push for ESG ratings to go beyond assessing environmental and social matters from the perspective of their relevance to financial or business performance.

Rasmus Andresen, an MEP acting on behalf of the Verts/ALE Group, for example, proposed that the regulation include an impact materiality requirement.

“All ESG ratings provided by ESG rating providers shall be based, at least partly, on the impact materiality of the rated entity or financial instrument on the environment and society,” his amendment read.

“Ratings or scores based solely on the ability of an entity to withstand the risks posed by ESG factors do not qualify as ESG rating”.

His amendment also sets out to require that where rating providers factor in financial materiality assessment in their ESG ratings, “they shall make sure that this dimension does not represent more than 25% of the rating”.

EESC opinion out

For now it is too early to say what the ECON’s final position will be on the ESG ratings regulation. Committee members will have to negotiate on this and the vote on the committee’s opinion is scheduled for late November.

The Commission published its proposal for an ESG rating regulation in June. This addresses the concept of double materiality, but stops short of mandating it, asking that providers “explicitly disclose” what it is the rating is measuring.

The Council, the Member States body, also needs to agree its position before trilogues can start. The Commission’s hope is that these negotiations can conclude before the 2024 European elections.

The only EU body besides the Commission to have a formal position on the ESG ratings regulation is the European Economic and Social Committee (EESC), which is not a co-legislator but an advisory body to the Parliament, Council and Commission.

The committee adopted its opinion on the ESG ratings regulation this week, saying that ESG ratings should never focus solely on financial risks stemming from environmental, social and corporate governance matters.

“The EESC believes that mandatory inclusion of double materiality should be part of [the] minimum quality requirements for ESG ratings,” it said.

Industry view

It is not yet clear how a push to mandate a double materiality lens for ESG ratings would be received by the industry. A position paper from the Future of Sustainable Data Alliance (FoSDA) this week suggests there may be concerns.

In the paper, the sustainability data group said the world of ESG ratings, scores and other data products was highly heterogeneous, including in what they sought to measure and the methodological approaches taken.

“Distinguishing among the various features of those products is key in identifying any existing or potential risks and developing a relevant approach to address them,” it said.

“Therefore, any obligations should take account of the heterogeneity of this market. Pursuing a ‘one size fits all’ approach would be disproportionate and risks stifling innovation in a rapidly evolving market.”

The latest digital edition of IPE’s magazine is now available