Companies in the UK that produce environmental, social, and governance (ESG) ratings for different firms will be subject to a new voluntary code of conduct. This move comes in anticipation of potential regulations in the sector, which handles trillions of dollars in investments.
Investors looking to invest in sustainable companies rely heavily on rating firms to make informed and reliable decisions with their capital. However, the rating sector is not currently regulated in the UK.
Investors have expressed concern about the lack of consistency in sustainability ratings between different providers, due to the use of a variety of methodologies used. Despite this, some companies still pay up to $500,000 for these ratings.
To tackle this, the Financial Conduct Authority (FCA) has announced a voluntary code of conduct for rating firms to address concerns about the lack of trust in these organisations. The code will cover governance, systems, and methodologies, and will aim to ensure that ratings are high-quality, free from conflicts of interest, and transparent.
The announcement comes a year after the FCA appointed the International Capital Market Association and the International Regulatory Strategy Group, a think-tank, to form a working group responsible for drafting the code, which aligns with recommendations from the International Organisation of Securities Commissions (IOSCO).
The working group includes ESG rating firms such as the London Stock Exchange Group, Moody’s), investment manager M&G, and law firm Slaughter and May.
“Today is an important step in increasing transparency and trust in the growing market for ESG data and rating products,” said Sacha Sadan, director of ESG at the FCA.
The voluntary approach taken by the UK differs from that of the European Union, which recently proposed a draft law to regulate ESG rating firms, aiming to tackle greenwashing and the overstatement of sustainability credentials by companies.
Officials from the UK finance ministry are currently consulting on the possibility of formal regulation for ESG rating firms, a process that will require time for implementation. Sadan stated that the code will play a crucial role in raising standards in the short term and will continue to apply even if the sector becomes subject to future regulations.
A public consultation on the code will run until October 5, with the final version set to be published by the end of the year. Notable ESG rating firms such as S&P Global, MSCI, and Morningstar’s Sustainalytics are also major players in this industry.
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