Sustainable finance update (asset management) – ESG Ratings Regulation and new definition of “prohibited weapons”

As a reminder, new rules coming into effect this summer may affect the asset management industry and that may be less on firms’ radars given the ongoing focus on SFDR 2.0.

On 2 July 2026, Regulation (EU) 2024/3005¹ (the “ESG Ratings Regulation”) will become applicable, while on 30 June 2026, Commission Delegated Regulation (EU) 2025/1775², amending Commission Delegated Regulation (EU) 2020/1818³ as regards the definition of prohibited weapons, will apply to administrators of existing EU Paris-aligned and EU Climate Transition Benchmarks, and which could also affect asset managers.

Below are some of the key concepts to retain, along with a brief description of the potential impact these texts may have on the industry.

1. ESG Ratings Regulation

The aim of the ESG Ratings Regulation is to enhance the integrity and transparency as well as the good governance and reliability of ESG rating activities. The Regulation applies to:

• (a) ESG rating providers established in the European Union that (i) publish the rating(s) on a website, or (ii) issue and distribute ESG ratings by subscription or other contractual relationships to, among others, regulated financial undertakings in the EU;
• (b) ESG rating providers established outside the EU that issue and distribute ESG ratings through subscription or other contractual relationships to, among others, regulated financial undertakings in the EU.

An “ESG rating” is defined in the regulation as an opinion or a score (or a combination of both) regarding a rated item’s profile or characteristics with regard to environmental, social and human rights or governance factors, based on an established methodology and defined ranking system of rating categories and irrespective of whether such ESG rating is labelled as “ESG rating”, “ESG opinion” or “ESG score”.

Most asset managers (i.e., AIFMs and UCITS management companies) will be exempt from the ESG Ratings Regulation. For example, ESG ratings issued by regulated financial undertakings that are used exclusively for internal purposes or to provide in-house or intragroup products or services as well as ESG ratings incorporated into products or services regulated under Union law (such as the UCITS Directive or AIFMD) and distributed to third parties are exempt. However, in the latter case, when an ESG rating is disclosed in marketing communications, the ESG rating provider must publish detailed information on the methodology (as listed in point 1 of Annex III of the ESG Ratings Regulation) on its website and provide a link to the relevant website in its marketing communication. The same requirement applies to asset managers subject to the new Article 13 (3) of Regulation (EU) 2019/2088⁴ (the “SFDR”), as introduced by the ESG Ratings Regulation.

Implementing measures (so-called “regulatory technical standards”) were intended to specify certain operational aspects of the ESG Ratings Regulation and ESMA published its final report in October 2025. However, in a letter to the European Supervisory Authorities and the European Anti-Money Laundering Authority dated 1 October 2025, the European Commission indicated that it would de-prioritise certain non-essential implementing measures, including the regulatory technical standards implementing the ESG Ratings Regulation.

Asset managers using ESG ratings or scores in the management of their funds and including this information in their marketing communications must amend their marketing materials to comply with Article 13 (3) of SFDR by 2 July 2026.

2. Prohibited weapons definition

On 28 August 2025, the European Commission adopted the abovementioned Delegated Regulation 2025/1775 (the “Delegated Regulation”), amending Regulation (EU) 2020/1818 (known as the “EU Climate Benchmarks Regulation”) as regards the definition of prohibited weapons.

As a reminder, the EU Climate Benchmarks Regulation defines the minimum standards for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks (together, the “EU Climate Benchmarks”) and notably provides for the exclusion of all companies involved in any activities related to controversial weapons from the EU Climate Benchmarks.

In the recitals of the Delegated Regulation, the Commission noted that the original term “controversial weapons” (and its definition) as used in the EU Climate Benchmarks Regulation “leaves too much uncertainty and confusion […] and should be clarified and simplified”, to align with international treaties on this topic, which instead refer to “prohibited weapons”.

Therefore, Article 12 (1)(a) of the EU Climate Benchmarks Regulation has been amended to replace the term “controversial weapons” with “prohibited weapons”. A second sub-paragraph has been added to specify that what should be considered as prohibited weapons are “anti-personnel mines, cluster munitions, biological and chemical weapons the use, possession, development, transfer, manufacture, and stockpiling of which is expressly prohibited by the international arms conventions to which the majority of Member States are parties, as listed in the Annex”. The Annex to the Delegated Regulation provides an exhaustive list of such conventions.

This amendment entered into force on 19 January 2026 and will apply to all benchmarks existing prior to that date from 30 June 2026.

Besides having repercussions on the administrators of EU Climate Benchmarks, this amendment may affect the investment policies of funds using ESG or sustainability-related terms in their names, as defined in the ESMA Guidelines on Funds’ Names using ESG or sustainability-related terms (“Guidelines”). According to the Guidelines, all funds using ESG or sustainability-related terms in their names must, among others, exclude investments in companies covered by Article 12 (1)(a) of the EU Climate Benchmarks Regulation. 

AIFMs and UCITS management companies managing funds subject to the Guidelines should verify the alignment of their funds’ exclusion policies with the new definition of “prohibited weapons” and make changes where needed.