(3 June 2022 – United Kingdom) Britain’s Financial Conduct Authority (FCA) stated aim to formally regulate environmental, social and governance (ESG) rating providers has resulted in a contrasting response from market stakeholders.
While this will undoubtedly see industry regulators globally follow the agency’s lead, investors are heartened. Rating agencies are less enthused however. Providers of ESG data and ratings have been in regulators’ crosshairs for some time and recently jumped up the priority list. The British government said in its 'Greening Finance' roadmap in October that it was considering bringing the sector under the FCA’s authority. Many market participants bemoan major discrepancies in ESG measurements and data quality problems. With trillions of dollars flowing into sustainable funds, indices and products every year, many of those investment decisions are based on data and analysis provided by companies that refuse to show how they come to their conclusions.
The number one consideration for regulators should be ascertaining exactly what purpose an ESG rating or score is seeking to serve. Regulatory harmonisation may be some time off however investors will be pleased the process has finally commenced for ESG ratings.
“Different data may lead to different assessments of similar or the same companies, and that might be fine, but we need to understand why these differences exist. I’m also concerned about whether [these service providers] are independent. But the starting point is them being more open on the methodologies they use” commented Dutch European Parliament Member, Paul Tang.