Industry welcomes potential regulation of ESG ratings providers The industry has welcomed the government’s plans to bring ESG ratings providers under the UK’s regulatory perimeter. In a statement, the government said HM Treasury will also join the ESG data and ratings code of conduct working group. “These services are increasingly a component of investment decisions, and the government wants to ensure improved transparency and good market conduct,” it said. The FCA, which has previously expressed its support for the change, said there was a “strong rationale” for regulatory oversight of these firms. “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.” The FCA added it favours a “globally coherent” approach in line with recommendations from the International Organisation of Securities Commission. ESG ratings, and those who provide them, are becoming increasingly embedded within investment processes, however the FCA recently said there is a very low correlation between different providers’ ESG ratings on any given entity. 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.” It is welcoming to see the government look at benefits of bringing them into the regulatory regime. There is an increasing dependency on data and metrics produced by these firms from asset managers and owners to meet regulatory reporting requirements such as TCFD, as well as using these within their responsible investment approaches, such as integrating ESG factors within the investment process. Developing a robust regulatory framework is essential in mitigating risk and providing ‘confidence’ in market structures. However, the regulations could reduce the concern among advisers over the lack of transparency on ESG definitions. The move could also assuage worries that advisers will be judged on asset allocation decisions made today by criteria developed in the future.
Industry welcomes potential regulation of ESG ratings providers
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