The UK government’s announcement that it will introduce a bill to regulate ESG rating agencies has been met with support by industry stakeholders who have said it will shine a much-needed light on the sector.
Chancellor Rachel Reeves announced the plan to regulate agencies that evaluate the environmental, social and governance performance of companies while on a recent visit to Toronto to meet bosses of Canada’s pension fund industry and Mark Carney, former governor of the Bank of England.
Reeves said that the Financial Conduct Authority (FCA) will set the rules of the new regime which will mirror international recommendations and the system being created by the EU.
Commenting on the chancellor’s plans, UKSIF CEO, James Alexander said: “A lack of clarity and transparency around some ESG ratings, where providers can sometimes come out with vastly different ratings of the same business, have caused confusion by not clearly outlining the methodologies used.
“This regulation should help open the black box on these sorts of judgments, not by forcing agreement or consensus, but by shining a light on how the underlying data is gathered and how ratings are calculated,” Alexander said.
The chancellor’s crackdown on the sustainable ratings industry is part of a global drive to increase transparency of the sector. Earlier this year, the former UK government and FCA made moves towards introducing binding rules for ESG ratings.
Additionally, the EU is now regulating ESG rating agencies, while the The CFA Institute Research and Policy Center published research last month pointing to a range of challenges facing EU investors around ESG disclosures, the reliability of data, and the complexity of ESG ratings, especially in the case of SFDR.
Also commenting on Reeve’s announcement was Simon Jones, head of responsible investment at Hymans Robertson.
He said: “Whilst ESG ratings typically reflect the internal management of ESG risks, they are often conflated with providing an assessment of the external impact that a company may have. Coupled with the fact that there are often discrepancies in ratings produced by different agencies, this can create a lack of trust.
“Regulation of ESG ratings providers will be helpful if it promotes transparency and consistency or approaches. However, we would not want to see this regulation extended to those using ESG data solely for the purposes of creating investment products.”
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