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December 15, 2023

FCA backs new ESG ratings code of conduct

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The UK government consulted this year on whether the FCA should regulate ESG rating providers (Photo: Mykhailo Polenok/Dreamstime)

The International Capital Market Association and the International Regulatory Strategy Group have launched a voluntary code of conduct for ESG rating and data product providers

The Financial Conduct Authority has voiced its support for a new voluntary code of conduct designed for providers of environmental, social and governance rating and associated data products in the UK.

The code sets six principles: transparency, governance, systems and controls, and management of conflicts of interest, and encourages better disclosures and internal controls.

Designed by the International Capital Market Association and the International Regulatory Strategy Group, the code is based on recommendations made by the International Organization of Securities Commissions. “The code is intended to be internationally interoperable, and it is hoped that it can represent an important step towards a globally consistent regulatory framework,” say the ICMA and the IRSG.

“With its strong focus on international consistency, this industry-owned code will play a key role in increasing transparency and trust in the ESG data and ratings market,” said FCA director of ESG Sacha Sadan in a statement. “We encourage all ESG data and rating providers to engage with and sign up to the code.”

The UK government consulted this year on whether the FCA should regulate ESG rating providers and is mulling its next move as momentum grows behind creating rules and establishing oversight of this area. The European Commission looks set to become the first jurisdiction to regulate this market, this month adopting a text that will form the basis for its negotiations with member states. 

The City of London Corporation’s policy chair, Chris Hayward, acknowledged that “the government might deem it necessary to implement a formal regulatory regime”, saying that the UK was one of the first countries to design a code of conduct for ESG raters after Japan and Singapore. The corporation co-sponsored the initiative.

The code could be applied by providers in any jurisdiction, as well as in jurisdictions that lack their own equivalent, its authors wrote. ESG rating providers should embed its principles within six months, while ESG data providers should do so within a year.

The code “addresses key concerns related to the credibility and consistency of ESG data, while also indicating potential future regulatory changes in the ESG data and ratings space”, Jamie Gray, partner at law firm Burness Paull, wrote on LinkedIn.

“A code of this scale needs to be global in coverage but also capable of adapting to local contexts,” he continued. “Environmental concerns in a water-scarce region may differ significantly from those in a region with abundant water resources.”

Others await the EU’s imminent ESG ratings rules. The code “is very high level with little policing action, making it an aspirational code more than anything,” said Sondre Myge, head of ESG at SKAGEN Funds. “Incoming EU regulation of these entities will probably be a lot more meaningful.”

This article has been updated to include Myge’s comments.

A service from the Financial Times