FCA Welcomes the Release of a Code of Conduct for ESG Ratings and Data Providers

The International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) have launched a new voluntary code of conduct for ESG data providers and ratings in light of increased regulatory focus on greenwashing risks within the industry.

Following the recommendations made by the International Organisation of Securities Commission (IOSC) in its November 2021 final report. The code aims to promote market transparency, strengthen good governance and proper management of conflicts of interest, and enhance system controls in the sector.

It is intended to be internationally congruous and serve as a benchmark for any providers that may not fall under potential future regulation.

The IOSC's final report had 10 recommendations to improve the reliability and usability of disclosed ESG ratings and products. However, the code only concentrates on the 7 recommendations related to ESG data and ratings providers, rather than other market participants such as regulators, rated entities, or users of data products and ratings.

Nicholas Pfaff, deputy chief executive officer and head of sustainable finance at ICMA, said the launch of the Code “marks an important step in further promoting internationally consistent standards across sustainable finance”.

“In the growing market for ESG ratings and data products, the Code will be vital for increasing transparency and trust,” he added.

In November 2022, the Financial Conduct Authority (FCA) commissioned ICMA and IRSG to convene an industry-led working group, called the Data and Ratings Working Group (DRWG). The group was formed to develop a voluntary code of conduct for ESG data ratings providers that would be applicable internationally.

This group brought together stakeholders from the UK, the European Union and the US representing ESG ratings and data products providers, rated entities, academics, and users of ESG data and ratings, such as asset managers, asset owners and banks to develop the code.

The FCA, the UK Treasury and other national and international financial regulators acted as observers as the code was agreed.

In a news item published on the FCA website, the Regulator has expressed its commitment to promoting globally aligned solutions and welcomed the launch of the code. Sacha Sadan, Director of ESG at the FCA stated:

 “With its strong focus on international consistency, this industry-owned code will play a key role in increasing transparency and trust in the ESG data and ratings market,”

He added: “We encourage all ESG data and ratings providers to engage with and sign up to the code.”

Earlier this year, the UK Government consulted with the FCA to highlight issues with ESG benchmarks and to discuss whether its regulatory perimeter should be extended to include ESG ratings. The latest statement published on the 14th of December confirms the FCA’s intention to work closely with the UK Government as it considers its next steps.

The new guidance is expected to be published in the second quarter of 2024.

About the author

Laura is the Digital Marketing Associate for Searchlight Insurance Training, part of UKGI Learning Solutions. Laura supports our digital design, website and content marketing strategies for Searchlight. 

Laura Roberts UKGI

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