The European Commission is set to regulate ESG ratings providers in efforts to improve the transparency of ESG data for investors and managers.
The new rules proposed Tuesday are aimed at enabling investors to make better informed decisions regarding sustainable investments, the EC said in a news release.
The EC said the ESG ratings market "suffers from a lack of transparency" and has proposed new regulations that will seek to prevent conflicts of interest and increase the integrity of ESG rating providers.
The proposal still requires approval from the European Parliament and EU leaders before it is effective.
ESG rating providers offering services to investors and companies in the EU will have to be authorized and supervised by Europe's financial services watchdog, the European Securities and Markets Authority.
Responding to the proposal, the European Fund and Asset Management Association said Tuesday that the reliance on external ESG data and ratings without sufficient regulation poses risks for managers.
Data sources and methodologies from ratings providers require better transparency to help managers and investors compare and align data with their ESG views and assessments, EFAMA said.
Also on Tuesday, the EC published the latest EU taxonomy criteria that investors and managers require to report on their investments under the Sustainable Finance Disclosure Regulation.
The commission approved criteria for economic activities such as sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems.