All aboard the ESG ratings regulation train
A few months ago I posted about why ESMA's EU ESG Ratings Regulation was such a positive development for carbon markets. The train is now ready for boarding.
2 July 2026: The Regulation becomes applicable. Substantive requirements take effect.
For BeZero, the next milestone is 2 August. We will notify ESMA of our intention to continue providing in-scope services to EU clients. Our formal application will follow by 2 November. We are on track for both.
We are not taking this decision lightly. We took independent legal advice from two separate top-tier law firms, both of whom confirmed that BeZero's carbon ratings fall within scope of the Regulation. We have also been in direct dialogue with ESMA as part of our preparations.
Our position is not necessarily universally shared by our peers. Ultimately ESMA will decide. It certainly comes with extra costs and operational complications. But we believe regulations are the best thing for enabling ratings to scale carbon markets.
Consistently applied regulation is a bedrock of effective markets.
Under Article 16 of the Regulation, ESG rating providers are explicitly prohibited from providing consulting services alongside their ratings activities. The same article covers statutory auditing, assurance engagements on sustainability reporting, and certain investment services.
The logic is the same principle that reshaped bond rating agencies after 2008: you cannot rate what you advise on. A rating derives its value from independence. The moment a provider is also consulting, verifying, or advising on the assets they rate, that independence is structurally compromised, regardless of intent.
This is not a grey area. It is a hard prohibition.
BeZero has explicitly avoided business models or products that combine ratings with MRV services, or consulting-type projects that want implementation partners rather than third party diligence providers - even when it’s meant leaving revenue on the table in a tough market.
In simple terms, the regulations give providers a stark choice:
Get on the train and offer regulated ratings only.
Create a complex and expensive set of subsidiaries and try to manage conflicts via regulated pathways.
Don't get on the train and offer unregulated ratings anyway and see how ESMA reacts.
Don't get on the train and don’t offer ratings.
BeZero has always operated as a pure ratings business. We do not consult. We do not advise on the assets we rate. We do not provide MRV services. We do not sell introductions. We do not forecast prices that our ratings impact. We publish our ratings and methodologies. We actively engage with carbon project developers to minimise inaccuracies (not necessarily differences of opinion) and are transparent about our approach.
It has been a deliberate choice to build BeZero on the same principles that underpin bond market regulations. In other words we’ve been acting like we’re operating under option 1 all along.
Option 2 is conceivable. It’s common in sell-side banks for instance (who have regulated trading-sales-analysts), but this carries prohibitive costs and complexities with the market at its current scale.
Even in this structure, providing both MRV and ratings would be a red line. This simply isn't a conflict that can be managed. One can’t answer, audit, rate their own homework.
The interesting challenge to the market is whether actors will rely on unregulated ratings. Obviously they have to date. All ratings are unregulated today.
But as I've said before, if an opinion moves money, the person and or institution giving that opinion should be regulated.
Opinions can be right or wrong, but institutional trust is built on accountability, and accountability requires regulation.
When the choice is real, my sense is the choice for buyers will be simple.
Finally, the Regulation also touches two other key areas.
The first is the business model. The Regulation recognises various business models are permissible for a regulated ratings provider. Both issuer-pay and subscriber-pay models are included in scope, but the requirements around conflicts of interest and their mitigation are material.
If you are paid directly or indirectly, for profit or pro bono, to perform research there's a potential conflict because "you may just tell the paymaster what they want to hear". This is an unfalsifiable truism. It is also a red herring. Regulations rightly focus on how a provider earns its revenue, which is clear, objective, and falsifiable.
The second is developer engagement. Carbon project developers, the rated entities in our world, are set to receive significantly stronger rights under the Regulation, including mandated pre-publication engagement and greater analytical transparency. This is a meaningful and underreported shift in the relationship between rating agencies and the projects they assess. Remember, ratings are an opinion (and not everyone will agree with it), but the process and rights around deriving that opinion are what need to be formalised.
This is a critical step forward for the market.
Regulation doesn't just set standards, it validates the models that were built with the right architecture from the start. For too long, carbon markets have operated without the structural guardrails that give institutional investors confidence in other asset classes.
ESMA's Regulation changes that. It defines what a carbon rating agency can and cannot do, and how it must operate. It elevates credibility to a regulatory bar, where the rater, those rated, and those using the rating all get rights and protections, and non-compliance carries real life accountability, i.e. financial penalties.
That is unambiguously good for a market that needs to scale capital into climate action, and elevates the entire market in the process.
The regulation train is boarding. BeZero is taking its seat.