The Financial Conduct Authority (FCA) has stated there is a “clear rationale” for the regulation of ESG ratings, in a paper that made the regulator’s support for ESG integration clear.
The watchdog has published a feedback paper to its consultation document: ‘ESG integration in UK capital markets’.
After gathering views, the FCA has stated it supports the government’s previous consideration that ESG data and ratings providers should be brought within its regulatory remit.
“We see a clear rationale for regulatory oversight of certain ESG data and rating providers – and for a globally consistent regulatory approach informed by the recommendations on ESG data and ratings developed by the International Organization of Securities Commission (Iosco) in 2021,” the FCA stated.
The watchdog is awaiting confirmation from HM Treasury as to whether or not this will come under its remit.
However, if this proceeds, the FCA has confirmed it would introduce a voluntary code of conduct for rating agencies in the interim while new regulation was formalised.
“Given the potential lead time before any such regime could come into force, we would – in the interim – work with the Treasury to convene, support and encourage industry participants to develop and follow a voluntary code of conduct,” the FCA paper read.
“Such a voluntary code could potentially continue to apply for ESG data and rating providers that fall outside the scope of any future regulatory regime.”
Elsewhere, the FCA is proceeding with work on ESG-labelled debt instruments, commonly referred to as green bonds.
A common criticism of green bonds, which are being issued at an unprecedented rate, is their lack of transparency and that these securities’ proceeds can be used for non-ESG compliant projects.
The FCA has reminded green bond issuers of the importance of transparency via the paper: “We encourage issuers of ESG‑labelled Use of Proceeds debt instruments to consider voluntarily applying or adopting relevant industry standards.
“We remind issuers, their advisers, and other relevant market participants of their existing obligation to ensure any advertisement is not inaccurate or misleading and is consistent with the information contained in the prospectus.”
The FCA’s support for regulating ESG data and rating providers has been welcomed in the industry.
AIC chief executive Richard Stone (pictured) said: “It’s clear that ESG data and ratings services must be well-governed, independent, transparent and have reliable methodologies and processes.
“Without proper oversight of these providers there are risks of misallocation of investments, greenwashing and consumer harm.
“ESG is an increasingly important investment consideration for investors, but too many claims still do not stand up to scrutiny. We look forward to working with the FCA and the Treasury to ensure ESG data and ratings are robust and credible.”
The IA and Pimfa were unavailable for comment.