SFDR Impact Series 2026: ESG Ratings Regulation – A Manager’s Perspective when Distributing Funds

The EU’s new ESG Ratings Regulation applies from 2 July 2026. Although aimed squarely at ESG rating providers, its effects will be felt right across the funds industry. In this edition of our SFDR Impact Series, we examine what this regulation means for asset managers distributing funds in and beyond the EU and set out the practical steps managers should be taking now.

Context and Relevance for Fund Distribution

The EU’s new regime under Regulation (EU) 2024/3005 on the transparency and integrity of ESG rating activities (the “Regulation”) will begin to apply on 2 July 2026.

The Regulation forms part of the EU’s broader sustainable finance framework. Its core objective is to improve the transparency, integrity, governance and independence of ESG rating activities, in response to concerns that ESG ratings can be opaque, difficult to compare and vulnerable to conflicts of interest.

For fund asset managers, the Regulation is not simply a compliance issue for ESG rating agencies. It will affect how ESG ratings are sourced, described and used in investment processes, due diligence, product governance and investor reporting. It will also affect how ESG ratings are used in fund marketing materials, particularly where funds are marketed to EU investors or where ratings are distributed or relied upon in the EU.

Regulation in Summary

From 2 July 2026, ESMA will become the direct supervisor of ESG rating providers offering their services in the EU. The Regulation requires ESG rating providers operating in the Union to be registered with, authorised by or otherwise recognised under the ESMA framework, depending on their status and location. It also introduces governance, organisational, conflict management and disclosure obligations for ESG rating providers, including requirements relating to the transparency of rating methodologies, models, key assumptions, data sources and the limitations of the ratings produced.

Impact Across the Fund Industry

The Regulation is directed principally at ESG rating providers, rather than asset managers as such. However, its practical effect will be felt across the funds industry because ESG ratings are widely used in portfolio construction, investment screening, stewardship, risk monitoring, manager selection, product classification, distributor due diligence and investor-facing ESG disclosures.

Managers that currently rely on third-party ESG ratings, proprietary ESG scores or group-level sustainability assessments should therefore treat the July 2026 application date as a prompt to review their ESG ratings dependencies and associated disclosures.

Who is in scope?

Direct impact

The Regulation applies directly to ESG rating providers that issue, publish or distribute ESG ratings on a professional basis in the EU. Specifically:

• EU-established ESG rating providers will generally need to be authorised or registered with ESMA in order to provide ESG rating services in the Union.
• Non-EU ESG rating providers that wish to operate in the Union will need to access the EU market through one of the available third-country routes, including endorsement by an EU-authorised ESG rating provider, recognition or inclusion on the basis of an equivalence decision.

Indirect impact

Asset managers and funds will not automatically be in scope merely because they use ESG ratings. However, managers should carefully assess whether any internal ESG scoring, ranking or rating tools are being issued or disclosed to third parties in a manner that could amount to an ESG rating activity. This is particularly relevant for managers that provide ESG assessments to clients, distributors, consultants, platforms, investee companies, group affiliates or other market participants beyond internal investment management use.

It is also worth noting that private ESG ratings not intended for public disclosure or distribution to third parties fall outside the scope of the Regulation.

Impact on managers distributing funds in and outside the EU

Supply chain and disclosures

• For managers marketing funds in the EU, the most immediate impact is likely to be supply-chain and disclosure related.

Managers should expect EU investors, distributors, platforms, fund boards, management companies and depositaries to ask more detailed questions about which ESG ratings are being used, whether the relevant providers are authorised or otherwise permitted to operate in the Union, and whether the manager has assessed the methodology, data quality, limitations and conflicts associated with those ratings.

• For non-EU managers marketing into the EU, the Regulation may have a practical extraterritorial effect.

A manager may be based outside the EU, and its fund may also be domiciled outside the EU, but if ESG ratings are used in connection with EU marketing, EU investor communications or EU-facing product materials, the manager should consider whether the relevant ESG rating provider is operating within the scope of the EU regime. This will be particularly important where offering documents, pitchbooks, factsheets or due diligence questionnaires refer to third-party ESG ratings, portfolio ESG scores, issuer ratings, fund-level sustainability ratings or ratings-based exclusions or thresholds.

• For EU managers marketing funds outside the EU, the Regulation may also influence global practice.

EU-authorised managers are likely to align their global ESG ratings governance with the EU framework, both for operational simplicity and because the EU regime may become a reference point for investor expectations in other markets. A manager using the same ESG rating provider across EU and non-EU funds may decide to apply a consistent due diligence and disclosure standard across its platform, rather than operating separate EU and non-EU controls.

• For managers marketing funds in both the UK and the EU, it should be noted that a “dual” approach may be required.

The UK is introducing its own ESG ratings regime in parallel, but on a materially different timeline (from June 2028) and with certain key distinctions in scope:

• • In the UK, an ESG rating falls within regulatory scope only where it is likely to influence a decision to make a specified investment.
  • The UK provides broader exemptions, including for ratings provided in the course of FCA-regulated activities, MiFID ancillary services and fund marketing activities, provided the rating is not offered as a standalone product or service.
  • The UK does not establish third-country access routes comparable to the EU’s equivalence, endorsement and recognition mechanisms, and the FCA’s approach to overseas providers remains under consultation. Critically, there is no mutual recognition between the two regimes: providers wishing to serve clients in both jurisdictions will need to seek separate authorisation from ESMA and the FCA.

Fund managers operating across both markets should therefore map their ESG ratings dependencies against each regime’s scope and consider whether their current providers will be permitted to operate in both jurisdictions by the respective application dates.

Distribution arrangements

Distribution arrangements should also be reviewed. Where fund distributors, placement agents, platforms or consultants use ESG ratings or fund sustainability scores in their own marketing or selection processes, managers should consider whether those ratings are consistent with the fund’s own disclosures and whether the manager has sufficient contractual and operational visibility over ESG claims made downstream. The Regulation is not a substitute for existing SFDR¹, Taxonomy Regulation², MiFID sustainability preference³, UCITS⁴ or AIFMD⁵ obligations, but it may sharpen regulatory and investor scrutiny of the evidential basis for ESG claims made in the distribution chain.

Offering and marketing materials

Managers should untimely review all offering and marketing materials to identify every reference to ESG ratings, scores, rankings or similar metrics.

• For external ESG ratings, materials should clearly state who produced the rating, what it measures, its date, what it applies to (fund, portfolio, issuer, etc.) and any limitations. Managers should not imply that an ESG rating is a regulatory label or guarantee of sustainability performance.
• For internal ESG scores, purely internal use for investment decision-making may fall outside scope, but any disclosure to third parties – e.g., in a pitchbook or investor presentation – may trigger obligations under the Regulation.

Website Disclosures: Regulation Versus SFDR

Fund managers already operating under SFDR, who reference ESG ratings in offering and marketing materials, should also ensure they have established a dedicated webpage containing the full Annex III, point 1 disclosure before including any ESG rating reference in marketing materials, with the caveat that, if already publishing information under SFDR (Articles 6, 8, 9, 10, 11 or 13) which is complying with this new obligation are not required to duplicate the disclosure under the ESG Ratings Regulation itself.

Recommended Actions

Managers should expect a transitional period during which rating providers submit notifications and applications, ESMA builds out its public register, and the market adjusts to the new perimeter.

Therefore, the recommended approach is to:

• Inventory: Begin with an inventory of all ESG ratings and rating-like tools used across the manager’s business, mapped by provider, jurisdiction, fund, strategy, document set and use case.
• Provider Due Diligence: Assess whether each provider expects to be authorised, recognised, endorsed or otherwise permitted to operate in the Union, and update due diligence, disclosure controls and marketing approval processes accordingly. This should also include assessment of appointed distributors and review of the current distribution arrangements.
• Compliance Backup: By 2 July 2026, be ready to explain not only which ESG ratings they use, but why they use them, what those ratings do and do not measure, and how those ratings support the ESG claims made to investors.
• Marketing Materials Review: Reconsider any marketing materials made available in countries where the funds are distributed and, if needed, replace or refresh such materials with the appropriate updated disclaimers for compliance with the Regulation.

More Than a Compliance Exercise

The ESG Ratings Regulation is, at its heart, about trust – giving investors’ confidence that the ESG ratings underpinning a fund’s sustainability story are transparent, comparable and robust. We believe that managers who act now to map their ratings dependencies and sharpen their disclosures will be best placed to turn this compliance exercise into a point of competitive advantage when the Regulation applies on 2 July 2026.

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¹ Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector, as amended.
² Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020, as amended.
² MiFID II sustainability preferences refer to the requirement, introduced by Commission Delegated Regulation (EU) 2021/1253 (applicable since 2 August 2022), for investment firms providing investment advice or portfolio management to collect and incorporate clients’ preferences regarding sustainable investments — defined by reference to the EU Taxonomy, SFDR sustainable investments, and consideration of principal adverse impacts — into their suitability assessments.
⁴ Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009, as amended.
⁵ Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011, as amended.