Multinationals assess ESG ratings risk as new EU regime takes effect

New EU rules governing ESG ratings take effect today, introducing a formal regulatory framework for the firms that assess companies’ environmental, social and governance performance. The new regime is designed to improve the transparency, integrity and independence of ESG ratings, which increasingly influence investment decisions, access to capital and procurement opportunities. We’ll speak to a sustainability expert about what the changes mean for employers and multinational organisations.

For HR teams, the issue goes well beyond environmental performance. ESG ratings increasingly take account of workforce issues including employment practices, training, diversity, health and safety, and corporate governance. That means decisions taken across HR and the wider business can have a direct impact on how an organisation is assessed by investors, customers and other stakeholders.

The new regime also reflects the growing importance of ESG ratings within financial markets. They are widely used by investors, lenders and asset managers when assessing companies, but until now there has been no dedicated EU regulatory framework governing how ESG ratings are produced or supervised. The new rules are intended to improve confidence in the market by increasing transparency around ratings methodologies and strengthening regulatory oversight.

For employers, the practical question is what this means for business strategy. Should organisations be paying closer attention to their ESG ratings? How much influence do ratings providers have over investment and procurement decisions? And what can companies do if they believe a rating does not fairly reflect their sustainability performance?

So let’s get a view on this. James Hay is a climate and sustainability expert and earlier he joined me by video-link to discuss it. So, with the new EU ESG Ratings Regulation now taking effect, 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.”

So the key takeaway is that ESG ratings are no longer simply a reputational issue. They can influence investment decisions, procurement opportunities and access to capital, making it increasingly important that companies understand how they are assessed and engage with ratings providers where appropriate. James is already working with organisations on the practical implications of ESG regulation and ratings. If you would like help in this area, then please do contact James – his details are on the screen for you.