The European Union is responding to long-standing criticism of ESG ratings, which has mainly focused on the low transparency of methodologies, the ambiguous interpretation of results, and the difficulty of comparing ratings across individual providers. The result is the EU Regulation 2024/3005 on the transparency and integrity of ESG rating activities (the so-called ESGR), which will begin to affect ESG rating providers from 2 July 2026 fully.
This regulation has a major impact not only on investors and financial institutions, but also on companies that use ESG ratings - whether for financing, supply chain management, or stakeholder communication. A typical example is EcoVadis, whose evaluation today plays a key role in the field of supply chain viability.
Why ESG ratings need regulation
A public consultation by the European Commission in 2022 confirmed that the ESG rating market suffers from several systemic problems:
Unclear evaluation objectives (for investors vs. firms)
Insufficiently described methodologies and weights of individual factors,
Difficulty understanding why the company has achieved a particular result
Risk of conflicts of interest, in particular for providers that also offer advisory services.
That is why the ESGR Regulation was created, which introduces a uniform regulatory framework for ESG ratings across the EU and entrusts the supervision of their provision to the European Securities and Markets Authority (ESMA).
ESGR: emphasis on methodology, processes and supervision
The Regulation imposes, among other things, an obligation on ESG rating providers to:
Publish evaluation methodologies, including the reasons for their changes;
Clearly describe the data sources, rating assumptions and rating logic;
Ensure analyst independence and robust management of conflicts of interest.
Functionally separate rating activities from other services (e.g. consultancy) to avoid any potential risk of conflict of interest;
Establish a transparent and publicly available complaints mechanism.
ESG rating providers will have to obtain authorization or recognition from ESMA, pay regulatory fees and allow for inspections, penalties and fines of up to 10% of annual net turnover.
EcoVadis in the context of ESGR: what is (not) changing
EcoVadis is most often perceived as a tool for evaluating the sustainability of suppliers, rather than as a classic ESG investment rating. Nevertheless, the issue of regulation and transparency of EcoVadis ratings is increasingly coming to the fore.
Recently, it has also been evident that EcoVadis is responding to growing market pressure and regulatory expectations: it is gradually increasing the level of transparency of the evaluation, refining the conditions for sharing results and medals, and providing the evaluated companies with more information about the structure of the score and the areas evaluated.
This shift towards greater transparency is also evident in concrete steps. In preparation for regulatory developments, EcoVadis recently published a new document, "Methodology Disclosure", detailing the assessment structure, materiality approach, data sources and how scores are calculated. The document explains, among other things, how the methodology and weights of individual indicators differ according to the size of the evaluated company (extra small, small, medium and large) and how factors such as the riskiness of the countries of operation or the extent of the company's operations are reflected in the final evaluation.
The published information also includes a transparent definition of the principles of awarding medals and badges, which are now explicitly linked to the relative position of the evaluated company in relation to a comparable group of companies in the given period and supplemented by clearly defined eligibility criteria, including the possible exclusion of companies from the possibility of obtaining a medal in certain specific sectors.
The ESGR does not apply to internal or non-public evaluations intended solely for own use, a threshold that will also matter for the specific use of EcoVadis. However, if the ESG rating is:
systematically distributed,
commercially provided to third parties,
used in the financial decision-making of regulated entities,
then the ESGR principles – in particular, the transparency of methodology, the separability of services and the possibility of review – become the de facto new standard expected by the market.
Transparency as a competitive advantage
Regardless of the formal regulatory impact, ESGR can be read as a clear signal of where the ESG rating market is heading. Today, companies are increasingly demanding that they:
understand exactly what their score means,
know which areas have the greatest impact on the outcome,
are able to defend their assessments internally against management, auditors or banks,
have the opportunity to comment on the data and methodological assumptions in a relevant way.
In this context, the transparency of assessments, whether for EcoVadis or other ESG instruments, becomes not only a matter of compliance with legislation, but also a strategic factor of trust.
Conclusion
The ESGR Regulation is significantly changing the ESG rating landscape in Europe. While its direct impact will vary depending on the type of provider and how the assessment is used, the principles of transparency, independence and reviewability will become the new standard.
For companies working with EcoVadis, this is an opportunity: to use the pressure on transparency to better manage sustainability, better internal orientation in ESG data, and strengthen trust with partners and regulators.