The Financial Conduct Authority has criticised ESG benchmark administrators and warned it might take enforcement action over a number of issues uncovered.
In a Dear CEO letter, published today (March 20), the regulator said a preliminary review of the overall quality of ESG-related disclosures showed a number of problems.
These included administrators not fully implementing ESG disclosure requirements and not implementing their ESG methodologies correctly (for instance using outdated data and ratings, or failing to apply ESG exclusion criteria).
Other issues include not ensuring underlying methodologies are accessible, clearly presented and explained to users and not including enough detail on the ESG factors included in these methodologies.
The FCA said it will be doing more work in this area, given the importance of ESG benchmarks.
“High quality ESG benchmarks are important to support trust in the market for ESG products and the transition to a net zero economy,” the FCA said.
“Where firms fail to consider our feedback, we will deploy our formal supervisory tools and, where appropriate, consider enforcement action.”
The letter comes after the FCA’s director of infrastructure and exchanges initially raised concerns over the benchmarks last year.
“We have concerns that some benchmark administrators have not accurately described the economic reality that their benchmarks measure,” Edwin Schooling Latter said at the time.
Flows into responsible investment funds have soared in recent years, and in January were responsible for £95bn out of the total £1.4tn of funds under management in the UK, according to the Investment Association.
The government and regulator are working to increase the regulatory scope of the FCA to include parts of this sector, for instance the government has announced plans to consult on giving the FCA powers to regulate ESG providers.
The FCA has also introduced proposed sustainability disclosure requirements and investment labels for funds.
However, there is still confusion over the exact definition of ESG, responsible and sustainable investing.
The terms environmental, social and governance in particular can be contradictory.
Advisers have been struggling amid a lack of transparency on definitions of the various terms used, and concerns are mounting that advisers will be judged on asset allocation decisions made today by criteria developed in the future.
sally.hickey@ft.com
