Britain’s Financial Conduct Authority (FCA) has urged companies involved in rating other firms’ sustainability efforts to adopt a new voluntary code of conduct, emphasizing the need for increased transparency and trust within the environmental, social, and governance (ESG) data and ratings market. This is a significant move in the financial UK ESG sector.
The International Capital Market Association and the International Regulatory Strategy Group collaborated to develop this code after the FCA’s request last year. The FCA’s director of ESG, Sacha Sadan, emphasized the code’s role in promoting international consistency and fostering transparency in financial UK ESG data and ratings.
While the UK is advocating for a voluntary approach to regulate ESG raters, the European Union has taken steps toward formal regulations in the financial UK ESG context.
The EU introduced a draft law to oversee ESG raters, part of a broader industry overhaul aimed at enhancing trust and combating greenwashing – a practice where companies exaggerate their sustainability credentials.
Reflecting recommendations from the International Organization of Securities Commissions (IOSCO), the British code addresses governance of rating systems, controls ensuring high-quality ratings, managing conflicts of interest, and transparency in methodologies related to financial UK ESG.
The decision to extend the FCA’s authority to regulate ESG raters remains pending, with the government expected to announce its stance soon.
Critics of current ESG ratings methodologies argue that they are overly complex, lack transparency, and tend to reward companies for disclosing more information rather than effectively managing ESG risks or reducing their environmental impact.
