The Fulfillment of States of Regulatory Supervision in Context: European Securities and Markets Authority (ESMA) Circulates an Invitation to Submit Comments on its Consultation Paper on the Technical Standards under the Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities

My colleague Andreas Rasche, Professor and Associate Dean at Copenhagen Business School, has circulated a reminder about an important consultation undertaken by the European Securities and Markets Authority (ESMA) relating to the implementation of  a Consultation Paper on the Technical Standards under the Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities."  Rasche explains:

ESMA has published the draft standards for the EU ESG Ratings Regulation. The standards specify further the "methodologies, models and key rating assumptions" that need to be disclosed from 2026 onwards. The new rules also list criteria that must be met when rating providers want to offer other services (e.g. consulting).

The standards ask raters to show "how major new information is taken into account in a rating change" and also to specify how significant alternations of methods affect ratings. Whenever raters publish aggregated ESG ratings, they must include a separate assessment of the E, S, and G dimension. The standards also fix the sequence and structure which need to be met when disclosures are made.

The draft standards implement the EU Ratings Regulation which was adopted last year. Feedback on the standards is open until 20 June 2025, and a final document will be published by October 2025.

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Give Feedback: https://lnkd.in/dVz5w2nW

The basis for all of this work, and much more is coming, starts from the decision to implement, in their own contextually relevant way, international standards and administrative objectives around issues of sustainability, human rights and governance  (of people and markets in furtherance of those primary objectives) that have been built into a number of international initiatives, including but not limited to the UN 20230 Agenda and its Sustainability Development Goals. When these are combined with the much more contextually relevant initiatives that seek to transpose those administrative policies into the European context, one begins to see taking shape the forms and policies that have been  developed to create a fairly comprehensive system of regulatory supervision of the core elements of economic activity (and therefore of markets) within Europe. From that kernel of regulatory systemicity, as an expression of elaborated core values about political governance and the relationship of individuals to the state and its organs,  European officials whose own mission is to develop and more fully realize these emerging principles (like those of other greater powers in global spaces) have sought means of projecting their view and regulatory forms of governance well beyond their borders. In part, this is undertaken, thanks to the creativity of jurists a century or so ago and their development of "effects" standards, through systems of applying domestic standards to all actors with some connection or effect within the territories (understood physically and virtually) of the regulating entity (in this case the E.U.). 

The Technical standards are meant to fulfill the requirements of the  Regulation on environmental, social and governance (ESG) rating activities 2023/0177(COD) PE-CONS 43/24 and amending Regulations
(EU) 2019/2088 and (EU) 2023/2859 (about 141 pages including annexes). In their Press Release (5 and 14 February 2024) on agreement, the EU Council and EU Parliament explained:

ESG ratings provide an opinion on a company’s or a financial instrument’s sustainability profile, by assessing its exposure to sustainability risks and its impact on society and the environment. ESG ratings have an increasingly important impact on the operation of capital markets and on investor trust in sustainable products. The new rules aim to strengthen the reliability and comparability of ESG ratings by improving the transparency and integrity of the operations of ESG ratings providers and preventing potential conflicts of interests. Under the new rules, ESG rating providers will need to be authorised and supervised by the European Securities and Markets Authority (ESMA) and comply with transparency requirements, in particular with regard to their methodology and sources of information. * * *

ESG rating providers established in the EU will need to obtain an authorisation from ESMA. ESG rating providers established outside the EU that wish to operate in the EU will need to obtain an endorsement of their ESG ratings by an EU authorised ESG rating provider, a recognition based on a quantitative criterion or be included in the EU registry of ESG rating providers on the basis of an equivalence decision in relation to the country of its origin and following a dialogue held between ESMA and the relevant third-country competent authority.

The object is to regulate commercial markets in ESG standards and ESG reporting, Left unattended, perhaps as the spaces now within which innovation and risk taking on development of standards and analytics may continue to evolve without State supervision, are those offered by NGOs (but only where these are provided without charge) and by "natural persons, including academics and journalists who publish and distribute ESG ratings for non-commercial purposes." (ESG Regulation, Preambular materials ¶¶23-24). One can presume that these exceptions are already subject to a distinct regime of regulatory supervision through EU and national systems of research and other grants (which can be effectively supervised as to form and content and which will be funded only if it advances whatever suits the donor), and journalists are understood as mere transmitters and thus subject to other systems of supervision (for example data protection, etc.).

In this context, the ESMA was tasked with a number of regulatory assignments to both flesh out the more technical aspects of regulatory supervision and to provide the basis for the intake necessary to develop  admission by actors into this regulatory universe.

These draft technical standards establish key elements of the regulatory framework in a number of areas. First, they set out the information that should be provided in the applications for authorisation and recognition of an ESG rating provider. * * * Second, they set out the measures and safeguards that should be put in place to mitigate risks of conflicts of interest within ESG rating providers who carry out activities other than the provision of ESG ratings. * * * Third, they specify in greater detail the information that is to be disclosed by ESG rating providers to the public, rated items, issuers and the users of ESG ratings. (Consultation Paper on the Technical Standards under the Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities."p. 5)

The ESG regulatory architecture is a small but telling part of this (re)construction of a vision of governing grounded, in large measure by an increasingly well developed set of principles and practices around the notion of "regulatory supervision." That notion is grounded, in turn, on the fundamental idea that political bodies--almost invariably techno-bureaucracies of functionally differentiated expertise, have a fundamental duty to protect political collectives with respect to key areas of activity through programs of standard setting, oversight, and management to ensure fundamental principles--starting, of course with stability, and then moving on from there to the fulfillment of all sorts of positive values/objectives--happiness, creativity, self-actualization, fairness, peace, etc. which is presented through principles and in language that is relatable to members of the managed collective. There is nothing odd about this; most states have adopted variations on this theme, for example in their regulation of disclosure in securities transactions. Nonetheless, the effort to develop more comprehensive and interlinked systems of supervision that, when coordinated, can effectively shift discretionary authority in core matters from actors to regulators, is something that, outside the Marxist-Leninist realms is only now assuming a workable form.

As such, there is something at its core that distinguishes this form of regulatory supervision from those of other liberal democratic markets driven collectives--the idea that the highest form of authoritative and legitimate political power lies in the duty/responsibility of public organs to manage all aspects of private life. And it brings the project closer to contemporary Marxist-Leninist sensibilities on the use of the market and private actors as a complement to the political projects of the State and the fulfillment of State objectives, all under principles of regulatory supervision. And thus the core of the characteristic that distinguishes what appears to be an evolving form of regulatory supervision from other variations of liberal democracy is centered on the allocation of autonomy in decision and action. Other forms of liberal democracy might adhere more closely to a fundamental premise that the aggregated action of private actors ought to drive policy, an autonomy that ought to be protected, as against one that more vigorously embraces an ordering premise  that public policy drives private (aggregated) desire. At a deeper level this points to an ongoing conversation about the relationship between technical and scientific expertise and political discretion. That divide continues ot generate sometimes lively debate even within the technocracies of the EU (see egDavos Discourse 3: Europe between Between Eagle, Bear, and Dragon and No Place to Go--Special Address by President von der Leyen at the World Economic Forum). The ongoing conversation, in turn, is now deeply affected by the ways in which technologies makes both technocracy and politics inherently manipulable concept.  Perhaps in the end Nietzsche was right to suggest that there is no free will, even with respect to scientific "truths"--if so one reverts to the politics of control.

It is in unpacking this sense of the project that these documents are fascinating and worthy a read for what it tells us about the governance philosophy that is being manifested through these regulatory measures. Indeed the question of the principles, nature, and manifestation of regulatory supervision provide a critically useful framework for approaching issues of the way that political systems understand and fulfill principles of democratic governance within their territories. As pieces of the architecture of regulatory supervision they may or may not work as effectively as they could.  It is likely that given the complexity of the system, and the need to integrate ESG governance into the larger framework for managing economic activity in Europe in accordance with and to further public policy,  

For all of that, one ought to be encouraged to submit comments on the proposal.  If one embraces  the cognitive parameters of European regulatory supervision models, one ought, as well, to contribute to its perfection. It is only in that way that the system. closer to perfection, can rise to meet is aspirations or fail in that enterprise, and in failing provide the basis for again moving forward to shape and fulfill the resulting values system that emerges.