EU Reaches Historic Agreement on ESG Ratings – Bringing Us Closer to the End of Greenwashing

The European Union’s landmark agreement on ESG ratings marks a turning point in the fight against greenwashing and a significant step towards a more sustainable future. By establishing clear standards and fostering transparency, these regulations empower investors to make informed decisions while holding companies accountable for their environmental and social impact. 

This agreement is not an isolated event. It reflects a global momentum towards responsible investment practices. From the ambitious climate goals of the Middle East to the innovative solutions emerging from the fintech sector, stakeholders across the world are recognising the urgent need for action. 

Here’s a breakdown of the main points – and why it matters to us all.

End to Greenwashing through greater transparency and accountability 

The introduction of more rigorous standards for ESG investing comes in response to mounting concerns over ‘greenwashing’, where companies exaggerate or misrepresent their sustainability credentials. 

Under the incoming rules, previously unregulated ESG rating providers within the European Union will be required to obtain authorisation and supervision from the European Securities and Markets Authority (ESMA).

Endorsement of ESG ratings by EU agency

For ratings agencies based outside the EU, their ratings will need endorsement by an EU-regulated agency. These agencies must explicitly disclose whether their ratings consider a company’s environmental and social impact in addition to its financial performance. This move aims to encourage ratings that reflect “double materiality” – acknowledging the two-way impact on both the company and the environment.

Vincent Van Peteghem, Belgium’s finance minister, welcomed the agreement as “transparent and regulated ESG ratings can have a significant impact on our transition to a more socially responsible and sustainable future.” 


Alignment with Paris Agreement

Under the new rules, rating agencies must separate ratings for environmental, social, and governance factors. Ratings pertaining to environmental issues must indicate whether they consider the company’s alignment with the Paris Agreement on reducing carbon emissions. 

Additionally, smaller ESG ratings agencies in the EU will initially adhere to lighter regulations to facilitate their growth in a sector dominated by major players such as MSCI, S&P Global, and Moody’s.

In contrast to the EU’s regulatory approach, Britain has proposed a voluntary code of conduct for ESG raters ahead of potential regulation. This demonstrates diverse approaches aimed at enhancing transparency and integrity in sustainable investing practices.

While these actions mark a significant turning point in the fight against climate change, other regions are also making significant strides in enforcing ESG rules – and should be given credit where it’s due. 


Middle East Role in ESG Enforcement

Take for example the Middle East, which is among the regions most likely to experience severe impacts from climate change and, with so much at stake, is understandably at the forefront of climate action. In 2023, nearly 80% of companies in the Gulf Cooperation Council (GCC) had implemented an ESG strategy, marking a significant increase of over 15% compared to five years before. 

Sustainability is the cornerstone of Saudi Arabia’s Vision 2030, as the nation focuses on creating a Net Zero future by 2060. The Kingdom is at the forefront of addressing energy and climate-related obstacles through pioneering solutions like the Circular Carbon Economy (CCE) and a progressively diversified energy portfolio. By 2030, Saudi Arabia aims to derive 50% of its energy from renewable sources.

Sustainability initiatives in the Kingdom are also helping to tackle climate change and preserve biodiversity. These include safeguarding endangered species and maintaining the Kingdom’s natural landscapes. Vision 2030 is also revolutionising urban living by introducing urban greening projects. These initiatives, combined with the EU’s recent regulation, underscore the global momentum towards promoting sustainable investment practices.


Fintech Innovation Paves the Way for Climate Action

The climate action  journey doesn’t stop with regulation. While the EU takes strides in regulating ESG ratings, the financial services sector – particularly fintech innovation – is vital to tackling climate change. 

Fintech firms are forging critical partnerships with financial institutions and payment firms to drive climate action. One example is Oman-based Mashreq, which has plans to develop a suite of carbon-offsetting financial products with selected clients.

Another example is Mastercard’s Priceless Planet Coalition, which aims to restore 100 million trees by 2025. In 2022, the company shared its plans to actively restore mangrove rainforests over two years in collaboration with Emirates Nature-WWF.

In summary, the EU’s agreement on ESG ratings represents a pivotal moment in sustainable finance, setting the stage for a more transparent and accountable investment landscape. This move, which is key for integrating environmental and social governance into financial decision-making, complements similar initiatives in regions like the Middle East. Together with fintech innovations driving climate action, this represents a significant shift towards a more sustainable future.