ESG Rating Methodology Liability - Spain Financial Markets Law

Spain has moved from unregulated ESG ratings to fully regulated, ESMA-supervised activity with civil + administrative liability. Framework is 3-layer: EU Regulation 2024/3005 + Spanish LMVSI 6/2023 + CNMV supervision.

1. New Law: Regulation (EU) 2024/3005

Published 12 December 2024, entered into force 1 January 2025, applies from 2 July 2026. This is first time ESG ratings are regulated in EU.

What is ESG Rating under Regulation?
"An opinion, score or combination regarding rated item's profile or characteristics with regard to Environmental, Social, Governance"

Scope: Applies to all ESG rating providers operating in EU - Sustainalytics, MSCI, ISS, Moody's ESG, etc.

Key obligations:

A. Methodology Transparency - Art 15-21:

• Methodologies must be rigorous, systematic, objective, continuous, of adequate quality and subject to validation
• Must disclose: models, key rating assumptions, data sources, weighting of E vs S vs G, materiality approach (single vs double), limitations
• Must publish on website and submit to European Single Access Point (ESAP)
• Prohibition of black box - Lack of transparency in applied methodologies was stated as main limit of ESG ratings

B. Separation & Conflict:
Must separate rating work from consulting, credit rating, audit, investment, banking, insurance and benchmark activities

C. Supervision:
ESMA is responsible for registration and supervision across EU financial markets. In Spain, CNMV (Comisión Nacional del Mercado de Valores) is national competent authority for enforcement.

D. Fines:
Up to 10% of annual turnover of provider - as per ESMA statement 1 July 2026

2. Spanish Implementation - LMVSI

Spain transposes via:

• Ley 6/2023, de 17 de marzo, de los Mercados de Valores y de los Servicios de Inversión (LMVSI) - New Securities Market Law
• Ley 11/2018 amending Commercial Code - Requires large companies to report non-financial information
• Directive (EU) 2022/2464 CSRD - Corporate Sustainability Reporting Directive

CNMV Role:
CNMV is Spanish public body responsible for supervision and inspection of securities markets. CNMV published:

• Criteria on application of SFDR and prevention of greenwashing (2022a)
• Communication on Monitoring of implementation of ESG regulations: transparency and investment policies of CISs

CNMV Advisory Committee in response to ESAs Joint Call for Evidence on greenwashing - January 2023 stated:

"In case of ratings (ESG ratings and/or other ESG data products), risk may be higher, as ESG rating providers use different methodologies that are not always publicly available"

This finding directly led to Regulation 2024/3005.

CNMV Findings 2023-2024 Review of CIS:
Regarding sustainability methodologies and indicators to measure achievement of ESG characteristics, CNMV found many funds had methodologies not in line with EC expectations - led to corrective actions.

3. Liability Regime - 3 Levels in Spain

Level 1: Administrative Liability - CNMV / ESMA

If provider fails to disclose methodology or has non-rigorous methodology:

• ESMA can withdraw authorization
• CNMV can impose sanction under LMVSI Art 302-312: Very serious infringement = Fine €300k to €5M or 5% turnover
• For Spanish financial institution USING flawed ESG rating for product labelling: Sanction under SFDR Art 14 + Spanish Law

Level 2: Civil Liability - Investor Claims

Under Spanish Law, ESG rating is not just opinion, if it is marketed as part of financial product.

Basis:

• Art 1101 Civil Code - Contractual liability: If asset manager promises ESG methodology (e.g. "weighted average ESG rating better than benchmark") based on third-party ESG rating, and methodology is flawed, investor can claim damages for breach.
• Art 1902 Civil Code - Extra-contractual: ESG rating provider liable if negligent methodology causes investment loss
• LMVSI Art 82 + 83 - Prospectus liability: If ESG rating in prospectus / KIID is misleading due to methodology flaw, issuer + provider jointly liable

Spanish Courts apply EU principle:
CSDDD also introduces civil liability for companies that intentionally or negligently fail to comply - aimed at protecting natural or legal persons

Level 3: Greenwashing Liability

EBA Final Report on Greenwashing 2024: Sustainability-linked loans and funds with misleading ESG ratings = greenwashing.

Spain follows ESMA anti-greenwashing rule effective 31 May 2024: Makes it actionable misconduct for FCA/CNMV authorised firms to make misleading ESG claims.

4. Case Laws Relevant to Spain

Spain has no Supreme Court case yet on ESG rating methodology (because regulation new), but EU case law applies directly via CNMV:

1. DWS / Deutsche Bank Case (Germany, but ESMA precedent) 2022-2024
DWS claimed ESG integration for $900B AUM. Whistleblower said true amount subject to ESG was far lower. SEC fined $25M, BaFin investigated.
Ratio for Spain: Methodology must be verifiable. If provider says "we use systematic methodology" but actually uses marketing overlay, it's fraud under new Regulation. Spanish court will apply same.

2. ASIC vs Vanguard Investments Australia Ltd FCA 1086
Vanguard claimed ESG exclusionary screens, but fund included violators. Court held misleading conduct.
Spanish Application: CNMV will use same reasoning under LMVSI Art 281 - misleading ESG information in CIS.[2024]

3. ASIC vs LGSS Pty Ltd FCA 587 - Active Super
Fund claimed to exclude coal, but had coal exposure. Federal Court found greenwashing.
Spanish Application: If Spanish pension fund uses ESG rating that does not actually exclude, trustee + rating provider liable.[2024]

4. Goldman Sachs AM - SEC Nov 2022 - $4M
Failed to follow ESG methodology disclosed.

5. BNY Mellon - SEC May 2023 - $1.5M
Misstatements about ESG considerations.

6. CNMV Enforcement 2023 - Spanish Funds
CNMV required 12 Spanish CIS managers to correct SFDR disclosures where sustainability methodologies and indicators were not in line with EC. Not public sanctions but corrective orders - precursor to fines under new regulation.

5. How to Mitigate Liability in Spain

For ESG Rating Provider operating in Spain:

1. Register with ESMA before 2 July 2026 - transitional period until Jan 2028 for existing providers
2. Publish full methodology document: Data sources, weighting (E 40% S 30% G 30%? etc), double materiality logic, update frequency, conflict policy
3. Separate commercial team from rating analysts - Chinese walls
4. Validation report annually

For Bank / Asset Manager using ESG Rating in Spain:

1. Don't blindly rely - Art 15 SFDR requires explain how ESG rating methodology assesses exposure and management
2. Include disclaimer: "Rating methodology is based on third-party ESG rating information that assesses companies' exposure to, and management of, material ESG issues" - as per Lazard SFDR disclosures registered with CNMV Madrid
3. Keep audit trail of due diligence on rating provider
4. If rating changes, inform client within 10 days - CNMV requirement