Multinationals assess ESG ratings risk ahead of new EU regime

The EU’s new ESG Ratings Regulation is fast approaching, with the new regime due to apply from 2 July. Although it’s still a few months away, many organisations are already reassessing how exposed they are to ESG ratings and what those ratings mean in practice. That matters because, as we’ll hear shortly, ESG scores are no longer just a reputational issue, they increasingly influence investment decisions, access to capital and how companies are assessed by the market.

There’s also a clear relevance for HR. ESG ratings don’t just focus on environmental performance; they also take account of social factors, including employment practices, workforce data, and training. Decisions taken now about sustainability strategy and people policies can therefore have a direct impact on how a business is scored. We’ll speak to a finance and sustainability expert about that.

The new EU regime represents a significant shift in how ESG ratings providers will be regulated and supervised. For the first time, there will be a formal framework governing how ratings are produced, how methodologies are applied and how companies can challenge ratings that are inaccurate or unfair. That’s important because ESG ratings already play a powerful role in the market. They are widely used by investors, asset managers, and lenders, and in some cases determine whether companies are included in investment benchmarks. As a result, changes in a company’s ESG rating can have real economic consequences.

As July approaches, the focus for many organisations is less about the technical detail of the regulation itself and more about what it means in practice. How vulnerable are they to changes in ESG scoring? How much influence do ratings providers have over perceptions of performance? And what can companies do now to ensure those ratings fairly reflect what they are actually doing?

There’s also the question of who within the organisation should be involved. While ESG ratings are often seen as a finance or sustainability issue, many of the inputs sit squarely with HR, from employment practices and training to workforce data and disclosure.

So let’s get a view on this. James Hay is a sustainable finance and ESG regulation expert and earlier he joined me by video-link to discuss it. So, is there a risk that pulling back on sustainability could impact a company’s ESG ratings?

James Hay: “So the short answer is yes. Now it's hard to generalise about ESG ratings because there are so many different approaches, there are so many methodologies but, in general, ESG ratings are assessing how a company performs on environmental and social issues. So for example, if you reduce your climate commitments, if you roll back certain social issues like employment practices, perhaps DEI, we've seen that in the US, then that can have a negative impact on your ESG rating and there are real issues that can be associated with that.”

Joe Glavina: “Should companies be concerned about their ESG ratings? Why do they matter?”

James Hay: “ESG ratings aren't just a reputational issue. They can really have an economic impact as well. So for example, ESG ratings are used by investors when making investment decisions, they're also used by companies sometimes when deciding who to choose as their suppliers. So if we think about the investment context, an asset manager may consider the ESG rating of a company before deciding whether to invest or not. Now, I can imagine the pushback to this might be that ESG ratings are just one of many factors that that companies, or asset managers, assess when deciding whether to invest but, in reality, these days a lot of investments are managed passively, which means they're managed according to a benchmark, and many benchmarks use ESG ratings. So if you are excluded from the benchmark because you have a poor ESG rating, then that can actually mean that you do not have that as a source of passive capital and that can have a big impact, essentially, on demand for your shares in the market. So it's not just about do I have a better ESG rating than my peer? This can really impact, for example, your cost of equity, your cost of debt, and ultimately your share price performance in the market.”

Joe Glavina: “How can companies engage with ESG ratings providers to ensure their ratings are fair and accurate?”

James Hay: “At the moment, ESG ratings providers already have mechanisms and channels to engage with companies to make sure that they can provide feedback on whether the information is accurate or not, but any action taken by a ratings provider in relation to that at the moment is voluntary. However, there's a new ESG ratings regulation coming into effect in July of 2026 and this really will create a much more effective mechanism for companies to hold ESG ratings providers to account, to make sure that the information they have on them is not just factually accurate but is also fair, so companies rightly can push back, perhaps, on ratings that do not fairly represent their ESG profile. Now I think part of that engagement has to do with assessing is the rating based on how I am performing on different environmental and social issues, but also, am I being unfairly treated because, for example, I may be a company in heavy industry where their ESG ratings can be comparatively poorer, or perhaps emerging markets, as well, where generally their ESG ratings are a bit lower. So I would certainly urge companies to use this new regulation to engage with ratings providers because, again, if they are being rated unfairly and it's not truly reflective of their ESG performance then there are potential economic impacts that might be excluded from investment benchmarks, for example. So this definitely represents a change in how companies can engage their ratings providers. There's also some similar regulation coming out in the UK, but the short issue here is that you don't need to wait for the UK regulation to engage with providers here in the UK because most ratings providers operate internationally so they will be captured by the European regime.”

Joe Glavina: “Finally James, what work are you doing with clients on this?

James Hay: “Yes, so we're looking to work with companies, to support them, to engage with ratings providers. Many companies, they don't understand how these ratings methodologies work. So not only do we understand the regulatory mechanisms to engage with ratings providers, but we actually have a deep understanding of the ratings methodologies themselves. Myself, I used to work at a ratings provider so I know how companies build these ESG ratings methodologies, and also where potential pitfalls are, where they could be potentially treating companies unfairly and rating them on the basis of bad information.”

As you heard there, James is already working with a number of companies on the practical implications of shifting sustainability regulation and enforcement. If you would like help in this area then please do contact James – his details are on the screen for you.