The Financial Conduct Authority (FCA), the conduct regulator for financial services firms and financial markets in the UK, announced today the formation of a working group to develop a code of conduct for ESG data and ratings providers.
Demand for ESG data, service and ratings has surged as investors increasingly integrate ESG considerations into the investment process, yet the activities and businesses of the providers are generally not covered by markets and securities regulators.
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.
Last year, 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. In June 2022, the FCA followed up with an expression of support for introducing regulatory oversight of certain ESG data and ratings providers.
As the government considers the call to regulate the ESG data and ratings space, the FCA said that is working to “convene, support and encourage industry participants to develop and follow a voluntary Code of Conduct.”
According to the FCA, the new code of conduct will take 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.
The FCA announced that it has appointed the International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) as the Secretariat for the newly formed group. The group will be co-chaired by M&G, Moody’s, London Stock Exchange Group (LSEG) and Slaughter and May, and will also include investors, ESG data and ratings providers, and rated entities.
Nicholas Pfaff, Deputy CEO of ICMA and Head of Sustainable Finance, said:
“This future Code supported by the FCA will be a significant step in the development of consistent global standards for ESG Data and Ratings providers.”