The Financial Conduct Authority (FCA), the conduct regulator for financial services firms and financial markets, announced that it has found “the potential for widespread failings” by administrators of ESG benchmarks, including poor quality of ESG-related disclosure and the use of outdated data or ratings.
In a letter sent to the CEOs of the benchmark administrators, the regulator warned of potential enforcement action if the issues are not addressed.
The warning by the FCA follows a preliminary review on ESG benchmarks launched after a letter sent in September to administrators highlighting the risk of poor disclosures. According to the FCA, the review “found that the overall quality of ESG-related disclosures made by benchmark administrators was poor.”
Some of the issues identified by the review included administrators not providing enough detail on the ESG factors considered in benchmark methodologies, failure to implement the methodologies correctly – such as using outdated data and ratings or failing to apply ESG exclusions – or to fully implement ESG disclosure requirements.
In 2021, the FCA launched an ESG strategy, which included initiatives aimed at enabling market participants to trust green and other ESG-labelled financial instruments and products, which also encompasses the services of providers of ESG data, ratings, assurance and verification. As part of the strategy, in October 2022, the regulator proposed a series of anti-greenwashing rules including the introduction of investment product sustainability labels and disclosure requirements. In the new letter, signed by the FCA’s Director of Infrastructure & Exchanges, Jon Relleen, the regulator points out that while the rules primarily focused on investment products, it would also apply to benchmark administrators, and the requirements to ensure that sustainability-related claims are clear and not misleading should be considered by the administrators in “benchmark naming, disclosures, and other supporting documentation, including marketing materials.”
The letter directed the administrators to ensure that strategies are put in place to address the issues identified by the FCA, and warned that the regulator “will deploy our formal supervisory tools and, where appropriate, consider enforcement action,” if the firms “fail to consider our feedback.”