The ESG Data and Ratings Working Group (DRWG), an industry group formed at the request of UK regulator the Financial Conduct Authority (FCA), announced today the launch of a draft voluntary Code of Conduct for ESG ratings and data providers. The DRWG has also established a consultation into the draft Code, which will remain open until October 5, 2023.
Key aims of the code include improving the availability and quality of information for investors at both the product and entity level, improving transparency, governance and systems and controls in order to enhance market integrity, and fostering better comparability of products and providers in order to improve competition in the ESG data and ratings space.
The new code of conduct comes as pressure builds to regulate providers of ESG ratings and data, with demand for the services surging as investors increasingly integrate ESG considerations into the investment process, while the activities and businesses of the providers are generally not covered by markets and securities regulators.
In June, for example, the EU Commission unveiled a proposal for ESG ratings providers to be supervised by European markets regulator ESMA, to ensure quality and reliability, with requirements including the use of rigorous and objective methodologies, conflict of interest prevention, and improved transparency into methodologies, models and key rating assumptions.
In November 2021, securities regulator standards setter IOSCO urged regulators to focus on improving transparency in the ESG ratings and data space, and to begin to apply regulatory oversight. IOSCO also provided a series of recommendations for regulators, such as requiring providers to identify and disclose potential conflicts of interest, and to consider the data and methodologies used by the providers.
The FCA announced the formation of the DRWG in November 2022, tasked with developing a code of conduct for ESG data and ratings providers, taking into account the IOSCO recommendations, as well as developments in other jurisdictions, in order for it to be internationally consistent, and to help encourage the development of consistent global standards.
Sacha Sadan, FCA Director of ESG, said:
“Today is an important step in increasing transparency and trust in the growing market for ESG data and ratings products. It’s also vital that the Code has been developed with international consistency in mind.”
The proposed code of conduct is built around six key principles, including Good Governance, ensuring that ESG ratings and data products providers have appropriate governance and oversight arrangements in place; Securing Quality, requiring providers to adopt and implement written policies and procedures to ensure high quality ESG ratings and data products; Conflicts of Interest; Transparency, covering the methodologies and processes that underpin ESG ratings and data products; Confidentiality, for management and protection of non-public information, and; Engagement, including providing covered entities with visibility into what to expect from the assessment process.
The FCA appointed the International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) as the Secretariat for the group. The DRWG is co-chaired by M&G, Moody’s, London Stock Exchange Group (LSEG) and Slaughter and May, and also includes investors, ESG data and ratings providers, and rated entities.
The Steering Committee of the DRWG said:
“Members of the DRWG have worked hard to make sure the Code of Conduct is internationally consistent, primarily through close alignment with the International Organization of Securities Commissions’ recommendations but also through taking into account developments in jurisdictions such as Japan, Singapore and the EU. We hope the Code of Conduct will be a significant step in the development of consistent global standards for ESG ratings and data product providers.”
Click here to access the draft Code of Conduct.