FCA to establish code of conduct for ESG data and rating providers

The UK financial watchdog will establish a voluntary code of conduct while it awaits further action from the Treasury.

The Financial Conduct Authority has announced it will develop a specific code for ESG data and ratings providers, albeit just on a voluntary basis, to bring greater market transparency to those services.

The code is set to focus on a number of recommendations released earlier this month by the International Organization of Securities Commissions. These are aimed at promoting “good practices” to tackle greenwashing risks relating to asset managers and ESG rating and data providers.

Using transparent and well-defined methodologies, promptly addressing potential conflicts of interest, making adequate public disclosures and improving information gathering processes are some of the good practices mentioned in the report. 

However, the UK financial watchdog is prepared to go further and is committed to “a proportionate and effective regulatory regime” but it requires permission from the Treasury to introduce additional legislation.

In announcing the news, the FCA noted that a code of conduct could continue to apply on those ESG data and ratings providers that would fall outside the scope of potential future regulation.

Increased reliance on third party ESG data has become an issue for financial market participants, as discrepancy and misalignment complicate the task of integrating ESG frameworks into daily investment processes.  

Roger Barker, director of policy and corporate governance at the Institute of Directors commented that at present a “huge amount of subjectivity” is involved in the construction of ESG ratings and indices. “It does the cause of ESG no good when the same company can be rated very differently depending on the ESG methodology being utilised. We need to coalesce around some key metrics for responsible business and ensure that they are measured in a credible manner,” he said.

The FCA aims for the code to be internationally consistent with developments in other jurisdictions, such as Japan and Europe. Japan’s financial services agency composed a draft code of conduct for ESG evaluation and data providers in July. Meanwhile in the EU, both the European Commission and the European Securities and Markets Authority have reviewed and consulted on potential regulation addressing dysfunction in the market.

The FCA initiative will be led by the International Capital Market Association, a trade association, and the International Regulatory Strategy Group, a UK-based policy joint venture, who will put together an independent group of stakeholders to design the code. The group will be co-chaired by M&G, Moody’s, the London Stock Exchange Group and law firm Slaughter and May, while the Bank of England, government departments and the FCA itself will be active observers.

The group is set to meet for the first time by year end.