Last year the UK’s Financial Conduct Authority (FCA) issued a discussion chapter seeking initial views from stakeholders on certain ESG issues in capital markets, including the currently unregulated field of ESG data and ratings and asked whether there is a case for regulatory intervention in this market.
This discussion chapter also sought views relating to green, social, sustainability and sustainability‑linked debt instruments including their prospectus, the ‘use of proceeds’ bond frameworks as well as the role of verifiers and second-party opinion providers.
In its feedback statement, the FCA has set out its policy actions and potential future direction of travel.
ESG data and rating providers: The FCA sees a clear rationale for oversight of certain ESG data and rating providers and supports the Government's consideration of bringing them within the FCA’s regulatory perimeter.
Arlingclose has often noted from discussions with fund managers that there is often low correlation between different providers’ ESG ratings on any given entity, an observation echoed in the FCA’s feedback statement. This can understandably stem from the multi-faceted nature of ESG, the low volumes of ESG and climate information in certain sectors/regions, the lack of standardisation of corporate disclosures, and fragmentation of reporting with an entity’s data and information spread across multiple reports.
The FCA does not consider the different judgements reached by ESG rating providers to be a source of harm as long as there is transparency about providers’ methodology, information and data inputs, outputs are determined through systematic processes and sound systems and control, there is robust governance and conflicts of interest are identified and managed.
If HM Treasury extends the FCA’s remit to include ESG data providers, there will be consultation on an effective regulatory regime. As there will be a lead-in time before new regulation is formalised, in the interim the FCA will support and encourage industry participants to develop and follow a voluntary code of conduct.
Other jurisdictions in the European Union and Asia are also contemplating closer oversight. Earlier this year the European Securities and Markets Authority (ESMA) issued call for evidence and found 59 ESG rating providers currently active in the EU. The European Commission has also published a call for evidence and consultation on the functioning of the ESG ratings market. The FCA supports an internationally coordinated and globally consistent regulatory approach.
ESG-labelled debt instruments: Here, the FCA will be taking a measured approach to ESG-labelled debt instruments. Reminding issuers of their existing obligation to ensure advertisements are not inaccurate or misleading, the FCA will encourage issuers of ESG-labelled ‘use of proceeds’ debt instruments to consider voluntarily applying or adopting relevant industry standards such as the International Capital Market Association’s Principles and Guidelines for green, social, and sustainability bonds, to consider the expertise and professional standards of verifiers’ and assurance providers and to engage with second party opinion providers who adhere to appropriate standards of professional conduct.