The FCA has created a focus group to develop a code of conduct for ESG data and ratings providers.
The group will be co-chaired by M&G, Moody’s, the London Stock Exchange Group and Slaughter and May, the regulator announced today (November 22).
Members of the group will include investors, ESG data and ratings providers, and rated entities, and will meet for the first time later this year.
The FCA does not currently regulate ESG data and ratings providers, though it has previously supported the extension of its powers, saying regulatory oversight of these areas would support “greater transparency and trust” in the market.
The FCA said: “If the Treasury extends our regulatory perimeter, we are committed to take the necessary steps to develop and consult on a proportionate and effective regulatory regime."
The regulator added that it is supporting the industry to develop a code of conduct while the government considers whether to extend its remit, and will seek to make the code internationally consistent to encourage the development of globally consistent standards.
ESG ratings are increasingly used by investors and asset managers to rate the environmental, social, and governance credentials of firms and funds.
Investment in ESG, or responsible or sustainable assets has increased in recent years, with £86bn of the total £1.3tn invested in funds in the UK sat in responsible funds.
However, there is concern that the quality of these ratings, and in particular ESG benchmarks, may not align with the expectations of their users and the end investors.
In September, Edwin Schooling Latter, the FCA’s director of infrastructure and exchanges, said the regulator was concerned some benchmark administrators have not accurately described the economic reality that their benchmarks measure.
“We believe that the subjective nature of ESG factors, and how ESG data and ratings are incorporated into benchmark methodologies, give rise to an increased risk of poor disclosures in ESG benchmark statements,” he said.
Other industry figures have said ESG ratings should be viewed as opinions.
The regulator recently introduced measures clamping down on how investment managers use terms such as “ESG” and “green”.
Rules will be introduced for funds, including three labels for sustainable products, which will require a certain amount of the fund to be invested in certain assets in order to quality.
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.
The lack of internationally aligned standards also makes it difficult for firms spanning different jurisdictions to have a comprehensive strategy that covers each separate set of rules.