Request Free Trial

UK financial regulator gears up for ESG challenge

By Rob Langston

Sustainability ratings and greenwashing in ESG debt are among the priorities of the Financial Conduct Authority.

The UK Financial Conduct Authority has identified a greater preparedness to bring ESG ratings within its purview, a potential crackdown on greenwashing, and greater support for ESG debt issuers as its key challenges, in its latest consultation.

The UK financial regulator received 50 responses to its consultation paper on issues related to ESG-labelled debt instruments and ESG data and ratings. Industry participants – including asset managers and asset owners – identified issues around the sustainability claims of some ESG-labelled debt instruments and the transparency of ESG data and ratings.

Cracking down on ESG debt

Concerns over ESG debt have grown as the size of the market has increased in recent years, with the FCA highlighting S&P Global Ratings’ estimate of $1.5tn of issuance for 2022.

The regulator said it will remind issuers and other market participants to ensure advertisements are not inaccurate or misleading, and added it may consider market oversight or enforcement measures where they do not meet its expectations.

The FCA said it would also call on issuers to consider relevant industry standards – such as the ICMA Principles and Guidelines for green, social and sustainability bonds – when issuing ESG-labelled debt.

GIB Asset Management head of fixed income Samantha Lamb said there is an expectation for investors and issuers to incorporate ESG into their processes and approach – but to achieve this there needs to be greater consistency to improve frameworks and data.

“We are rightly demanding that investors and companies move to a new paradigm where there is a consistent approach to sustainable investing,” she said. “However, we’re asking them to achieve this before the frameworks and language for sustainable investing have been made consistent and all the data to facilitate decisions within these frameworks has been gathered by companies and made available.”

Lamb added that while there is a tremendous amount of work taking place to improve both frameworks and data availability, neither is complete nor mature. “Anything the regulator can do to create global consistency and simplicity in frameworks and data would reduce the risks of greenwashing over the longer term.”

Daisy Streatfeild, sustainability director at Ninety One Asset Management, said while standards supporting transparency and greater comparability would be welcome, any intervention would need to take into account other factors. “Transparency and greater comparability for how products are labelled are particularly key to investing sustainably and integrating ESG, and wider use of available standards can help,” she said.

However, Streatfeild noted the approach also needs to recognise that ESG and sustainability-related products cover a wider range of purposes, from risk management to impact.

“Standards, definitions and disclosure requirements that are too narrowly drawn can risk reducing investments in companies or activities that will positively contribute to sustainability outcomes,” she added. “For example, to achieve net zero, we need investments in instruments that support the transition, not just traditional green bonds.”

Support for ratings regulation

The FCA said there was a “clear rationale” for regulatory oversight of certain ESG data and rating providers, as well as a need for a globally consistent regulatory approach informed by the recommendations developed by the International Organization of Securities Commission in 2021. It also supports the UK government’s proposal to bring ESG within its regulatory perimeter.

Respondents to the consultation generally supported increased regulatory oversight of ESG rating providers; a focus on transparency, governance/systems and controls; and management of conflicts of interest that would help to achieve better outcomes for markets and consumers.

The FCA is not the only regulator looking at ESG ratings. EU financial services watchdog Esma has identified some notable shortcomings in ESG ratings and the data provider market.

European asset managers highlighted the lack of coverage for some industry and entity types – such as small and medium-sized enterprises and non-listed companies – as well as low levels of transparency for rating methodologies and data sources.

A lack of standardisation, low correlations between different providers’ ESG ratings, and misalignment on the definition of ESG were also considerable challenges, hampering comparability between providers.

A service from the Financial Times