A “Dear CEO” letter sent by the regulator says a review of the quality of disclosures made by a sample of benchmark administrators in the UK revealed the standard was “poor”. It went on: “There were often instances where benchmark administrators did not provide sufficient detail and description of the ESG factors considered in their benchmark methodologies.”

And the FCA signalled it would take a tough line if it doesn’t see improvement. “We expect all benchmark administrators to have strategies to address the issues identified in this letter. We will be doing more work in this area to address the potential failings, and expect firms to be able to explain these strategies on request. We will use the full range of our tools where this does not happen.”

Concerns outlined

The letter references concerns outlined in a previous communication issued last September in which the FCA observed that “the subjective nature of ESG factors and how ESG data and ratings are incorporated into benchmark methodologies could increase the risk of poor disclosures”. The concern that “the quality of benchmarks may not align with the expectations of users and end investors” was expressed.

Risks and issues in the following areas are identified in the letter;

• Benchmark statements – The FCA says that “In our review, we noted that some descriptions of the market or economic reality measured by benchmarks were generic, particularly in benchmark statements for families that covered a broad range of benchmarks.” It reminds firms that they are required to “provide sufficient explanations in their benchmark statements on how ESG factors are reflected against each of the requirements referred to in paragraph 2 of Article 27 of the UK BMR”.
• Benchmark methodologies – Administrators are reminded that they “must provide specific information on how key elements of the methodology reflect ESG factors for each benchmark or family of benchmarks” and that “The minimum content of these explanations is set out in the UK version of Commission Delegated Regulation (EU) 2020/1817”. The FCA is concerned that this is not happening, references encouraging the adoption of a voluntary Code of Conduct, and clearly states it now supports “introducing regulation in this area”.

Similar concerns are expressed over low Carbon benchmarks regulation and the robustness and reliability of ESG benchmarks generally.

This latest move by the regulator to firmly establish workable measures in the ESG space comes in the wake of it issuing a consultation paper, Finance for Positive Change, which aims to close what it terms the “say-do gap”, and moves made last October to tackle greenwashing.