As part of its Spring Budget, unveiled yesterday, the UK government said it “will regulate providers of ESG ratings to users within the UK”.
The Financial Conduct Authority (FCA) has been keen to introduce stricter rules for the industry, but has been waiting for its “regulatory perimeter” to be widened to permit it to do so. Yesterday’s announcement paved the way for binding rules by extending the regulator’s remit.
The FCA has previously talked about “the case for closer regulatory oversight of ESG data and ratings providers”. However, a consultation run by UK Treasury last year only covered potential provisions for ESG ratings, suggesting that other ESG data products will be exempt from any future regime.
The government’s latest statement also refers solely to ESG ratings.
ESG ratings have been at the centre of controversy in recent years. Some politicians in the US have accused them of being a tool to help starve American fossil-fuel companies of capital, and suggested that their methodologies favour Chinese firms, while others argue providers aren’t clear about the limitations of the scores they provide.
Investors and consumers can often believe a rating indicates how much a company contributes to sustainability objectives, when many of the ratings simply reflect how well-managed ESG risks are managed by a business.
“There are a number of issues with existing ESG ratings that have needed addressing, including, for example, how companies are able to offset deforestation by hiring a more diverse management, and use self-disclosures,” said Alexandra Mihailescu Cichon, chief commercial officer of RepRisk.
Legislators in the EU are also developing stricter rules. A provisional agreement was reached at the start of February, which would force ESG ratings providers to break with their consultancy arms and be transparent about their methodologies.
Those rules now need to be endorsed by the European Parliament at a plenary in April.
It’s likely that the UK regulation will stick closely to a voluntary code of conduct launched in December, and already endorsed by the FCA. Owned by the International Capital Markets Association, the code is based on recommendations from IOSCO.
At the time of its launch, the FCA encouraged ESG data and ratings providers to adopt the code.
HM Treasury is still analysing feedback from the consultation it ran last year, and will publish the outcome shortly.
Read the digital edition of IPE’s latest magazine
No comments yet