The UK government is considering bringing ESG ratings providers under government regulation to ensure the country “retains its global leadership” in the rapidly growing sector.
Last week, the UK Chancellor Jeremy Hunt announced a number of reforms to financial services regulation in the hopes of “turbocharging” growth in the UK.
As part of the package, the government will set out a new green finance strategy early next year, as well as consult on bringing ESG ratings providers “within the regulatory perimeter” in Q1, under the Financial Conduct Authority’s (FCA) remit.
“These services are increasingly a component of investment decisions, and the government wants to ensure improved transparency and good market conduct,” a government statement said.
In August, the FCA outlined its ambitions to create a new voluntary advisory committee focused on ESG issues, with new members being announced today. This committee is tasked with tackling the issue of ‘greenwashing’ – the practice of deceptive advertising or marketing employed by some organisations or companies.
The inclusion of sustainable ratings providers within the FCA’s control is a key step towards consistency across the rating bodies, which will increase trust in ratings from different providers and investor confidence.
“We look forward to working closely with the government on the next steps, encouraging regulation that focuses on transparency, good governance, management of conflicts of interest, and robust systems and controls.” said Sacha Sadan, head of the FCA’s ESG division.
The regulator added it favours a “globally coherent” approach in line with recommendations from the International Organisation of Securities Commission (IOSCO) who previously published recommendations on how to regulate ESG ratings agencies.
Richard Stone, chief executive of the Association of Investment Companies, said there were very high levels of scepticism over ESG claims.
“Regulating to increase market confidence is essential to protect investors and to develop the ESG investment market for the long term…we believe the hurdles to obtain such a label should be meaningful and high,” he said.“Trust in those ratings is critical.”
