FCA starts development of ESG rating providers’ code of conduct

November 24, 2022

A Financial Conduct Authority (FCA) taskforce has been formed to help regulate ESG data and ratings providers.

The working group will be co-chaired by M&G, Moody’s, London Stock Exchange Group, and Slaughter and May, and will also feature stakeholders, investors, and the providers themselves.

The International Capital Market Association (ICMA) and International Regulatory Strategy Group (IRSG) will provide administrative support.

The group’s primary function will be to develop a voluntary code of conduct to help with transparency and confidence in the burgeoning sustainability-products marketplace.

The FCA says that while it is not inherently harmful that ESG ratings vary, it is vital providers are clear about methodology, disclose conflicts of interest, and operate consistently and with robust governance.

The UK body’s action comes after global standards setter, the International Organization of Securities Commissions (IOSCO), urged regulators to focus on improving transparency in the sector.

Last year, the FCA launched initiatives aimed at improving trust in green and other ESG-labelled financial products and services.

It is all set against the context of a huge spike in appetite for sustainability investing, with the ESG industry valued at about £35 trillion in the summer of 2022.

Demand from investors for ESG appraisals has surged but the activities and businesses of the providers are generally not covered by markets and securities regulators.

It may yet lead to government intervention but for now the FCA says it is focussed on encouraging “industry participants to develop and follow a voluntary code of conduct”.

ICMA deputy CEO Nicholas Pfaff said: “This future code supported by the FCA will be a significant step in the development of consistent global standards for ESG data and ratings providers.”