HM Treasury has released a consultation into whether ESG ratings providers should be regulated.
The Treasury said there was a clear benefit to be gained from improving the transparency of the methodologies, governance and processes of these providers.
The consultation, launched today, affects only potential rules for ESG ratings providers, not for those who provide the data.
It has been released as part of the government's 'green finance strategy'.
The Treasury said it would monitor the data market alongside the FCA and in the meantime a voluntary code of conduct was being developed by an industry working group.
Sacha Sadan, director of ESG at the FCA, said: “We have said that we see a strong rationale for regulatory oversight of ESG ratings providers and for globally consistent regulation.
“This will improve confidence in the market and support the transition to net zero.”
ESG is becoming an increasingly large part of investment decision making, with research by SustainAbility in 2020 showing 65 per cent of institutional investors were found to use ESG ratings at least once a week.
The FCA has previously warned that there was a low correlation between different providers’ ratings on any given entity.
Some industry commentators have said ESG ratings should be viewed as opinions.
The International Organization of Securities Commissions and the OECD have both recommended that regulators pay more attention to ESG ratings and data, with the former setting out more detailed guidelines suggesting how regulators could ensure the ratings are of a high-quality and sufficiently independent.
The consultation is part of the so-called Edinburgh Reforms, a group of wide-ranging reforms to financial services legislation announced by chancellor Jeremy Hunt at the end of last year.
The FCA, which has previously expressed its support for the change, said there was a “strong rationale” for regulatory oversight of these firms.
Exclusions
Not-for-profit organisations and charities would be excluded from the legislation, as well as ratings produced by a company solely for internal use, such as asset managers who use their own ratings to make investment decisions.
But if companies use these ratings for both internal use as well as selling on these ratings as a standalone product or part of a bundle, the ratings will not be exempt from the legislation.
Some small companies may be excluded from the rules, to prevent competition in the sector being hampered.
The consultation will close at the end of June this year.
Gemma Woodward, head of responsible investment at Quilter Cheviot, said there was a growing dependency on data and metrics by asset managers and owners.
"However, this is not yet a standardised process and if an investment manager uses one external data provider, often it will have inherent biases which will likely skew the outcome as the rating would be based solely on that provider’s data and does not take into account any other research."
sally.hickey@ft.com
