Germany: New EU legal framework for ESG ratings – between increased transparency and regulatory complexity

In recent years, ESG ratings have become a key tool for investment decisions, corporate governance, and risk assessment. They influence capital flows, strategic corporate leadership, and reputation management in equal measure. Until now, the market has been largely unregulated: heterogeneous assessment methods, limited traceability, and potential conflicts of interest have called the validity of many ratings into question.

With Regulation (EU) 2024/3005 on ESG rating activities (known as the “ESG Rating Regulation” or ERR), the European Union is creating a binding legal framework for ESG rating providers for the first time. The regulation came into force at the beginning of 2025 and will apply in Europe (in Germany without further implementation measures) from July 2, 2026. The aim is to strengthen the reliability, transparency, and integrity of ESG ratings, thereby increasing the confidence of market participants and investors.

Objective and structure of the ESG Rating Regulation

The ESG Rating Regulation is intended to regulate the issuance, distribution, and, where applicable, publication of ESG ratings, without regulating their use. To this end, three key regulatory instruments will be implemented:

• Authorizing and supervisory regime: ESG rating providers based in the EU require authorization from the European Securities and Markets Authority (ESMA).
• Governance requirements: ESG rating providers must ensure an independent and transparent organizational structure and avoid conflicts of interest, in particular by separating ESG rating activities from other business areas such as consulting or credit ratings.
• Transparency requirements: Methodology, data sources, valuation assumptions, and any limitations must be disclosed in detail to ensure the transparency of ESG ratings.

The ESG rating regulation is largely comparable to Regulation (EC) No. 1060/2009 on credit rating agencies. With this regulation, the EU is applying a proven supervisory model for credit rating agencies active in the financial market to the ESG rating sector for the first time, thereby strengthening market integrity and trust.

Wide scope of application and cross-border effect

The scope of the regulation is broad: for companies based in the EU, simply publishing an ESG rating (e.g., on their website) is sufficient.

However, the ESG Rating Regulation may also apply beyond the borders of the EU. For companies not based in the EU, the ESG rating regulation applies if they distribute ESG ratings to regulated EU financial institutions (e.g., via email distribution lists). For providers operating globally, this may require significant adjustments to internal structures.

ESG rating providers based outside the EU can register and obtain approval in a separate procedure and are then permitted to distribute ESG ratings in the EU.

Furthermore, the European Commission may issue an equivalence decision with regard to non-EU countries, which is intended to simplify the distribution of ESG ratings by non-EU providers (similar to the endorsement procedure known from international accounting regulations).

Finally, under certain (strict) conditions, ESG rating providers in the EU are also permitted to adopt ESG ratings from providers based outside the EU.

Organizational separation and conflict of interest management

A key element of the ESG rating regulation is the requirement for a clear organizational separation between ESG rating activities and other potentially conflicting business areas. Providers who, for example, offer consulting or data services to the same companies must either create separate legal entities or implement internal functional safeguards to ensure independent assessment.

This could prove problematic insofar as globally active groups are confronted with considerable legal and organizational complexity. The establishment of separate entities could lead to duplicative structures and higher costs, while demonstrating the existence of effective internal barriers may prove difficult.

Transparency and disclosure requirements

The regulation also requires comprehensive disclosure of the basis for assessment, including methodology, data sources, assumptions, weighting of individual factors, and limitations. The RTS specify the minimum content and provide for regular updates to the methodology. This significantly improves transparency for investors and issuers. Nevertheless, methodological divergence remains, meaning that ratings continue to be regarded primarily as the opinion of the respective provider.

Conclusion

The regulation represents a milestone for the market integrity of ESG ratings. It creates transparency and reduces conflicts of interest without harmonizing methodological diversity.

Companies should use the remaining time until July 2, 2026, to adapt their internal mechanisms — especially in light of the rapidly expanding and cross-border scope of application.

With the kind support of Franka Förderer—student assistant.