The Financial Conduct Authority (FCA) is intensifying its Environmental Social and Governance (ESG) work, and is adding a new group to develop a Code of Conduct for data and ratings providers. As financial services firms are integrating ESG more and more into their work and products, firms are increasingly reliant on third party ESG data and ratings services.

The FCA has already addressed the need to introduce regulatory oversight of certain ESG data and ratings providers in the Feedback Statement on ESG integration in UK capital markets (FS22/4). The finance regulator thinks this work would support more transparency and trust in the market for ESG data and ratings services.

“If the Treasury extends our regulatory perimeter, we committed to take the necessary steps to develop and consult on a proportionate and effective regulatory regime, with a focus on outcomes in areas highlighted in the International Organization of Securities Commissions’ (IOSCO) recommendations. These include transparency, good governance, management of conflicts of interest, and systems and controls’” the statement declares.

Voluntary Code

The UK Government is currently considering bringing ESG data and rating providers within the FCA’s regulatory perimeter. However, such regulatory work can take time. To maintain momentum, the FCA has worked to convene, support and encourage industry participants to develop and follow a voluntary Code of Conduct.  

“We welcome the appointment of the International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) as the Secretariat leading this work. This Secretariat offers an in-depth understanding of both the UK and global financial markets and will ensure an unbiased and balanced representation of all key stakeholder groups”, the statement adds.

This Code is another step in FCA’s proactive ESG work. Earlier in August, FCA was looking for external experts to establish a new advisory committee to help on ESG issues and developing its ESG Strategy.

Global standards

The Code will seek to be internationally consistent and encourage global standards. The FCA says that it will continue to work with international regulatory partners, such as the ongoing Call to Action work with IOSCO, which aims to encourage a coordinated approach to the development of the Code of Conduct. It’s also possible for the Code to continue to apply for ESG data and ratings providers that fall outside the scope of potential future regulation. Besides IOSCO’s recommendations, the Code will also survey developments in jurisdictions such as Japan and the EU.

The Secretariat will summon an independent group to develop the Code of Conduct, and the FCA, the Bank of England and other financial regulators and government departments will sit as active observers.

The new group will go under the name ESG Data and Ratings Code of Conduct Working Group (DRWG). DRWG will be co-chaired by M&G, Moody’s, London Stock Exchange Group (LSEG) and Slaughter and May, and will be involve stakeholders, including investors, ESG data and ratings providers, and rated entities. The group aims to have its first meeting before the end of this year.