The International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) have launched a voluntary code of conduct for Environmental, Social and Governance (ESG) ratings and data products providers (the Code).
Sustainable finance is a key pillar in the drive for Net-Zero, creating a growing demand for reliable ESG ratings and data products which clearly outline companies’ sustainability efforts to consumers and investors. As a result, the role and influence of ESG ratings and data products providers in financial markets have grown significantly, which has led to calls for closer scrutiny of the transparency, quality and reliability of their products.
In 2022, the FCA appointed the ICMA and IRSG to convene the ESG Data and Ratings Code of Conduct Working Group (DRWG) which is co-chaired by a Steering Committee consisting of Moody’s, M&G, Slaughter and May and the London Stock Exchange Group, to develop a globally consistent voluntary code for those providing third-party data and ratings.
The industry working group brings together stakeholders such as ratings and data providers, asset managers, asset owners, banks, corporate rated entities, NGOs, academics and other organisations.
The FCA, the Treasury and other national and international financial regulators acted as observers as the Code was agreed.
Transparency and good governance
In line with IOSCO’s recommendations, the Code focuses on promoting transparency, good governance, management of conflicts of interest, and strengthening systems and controls in the sector.
The Steering Committee said: “We hope the Code of Conduct, although having roots in the UK, can provide an international model and play a role in helping to ensure consistent global standards for ESG ratings and data product providers.”
Farmida Bi, CBE, Chair of the IRSG Council, said that the Code will support investor confidence in ESG ratings and data to unlock capital for the transition to Net-Zero. Bi added: “A comprehensive, proportionate and globally consistent voluntary code of conduct for ESG ratings and data will help ensure this market is fit for purpose, in turn supporting market practitioners to assess the risks more accurately.”
Sacha Sadan, FCA Director of Environmental, Social and Governance, said that the FCA is committed to “using our voice and influence to promote globally aligned solutions where possible … and encourage all ESG data and ratings providers to engage with and sign up to the code”.
The Code’s six principles
The Code aims to enhance consistency, transparency, and accountability in the financial services industry to ensure that the market is able to have confidence in the integrity of ESG ratings and data products through enhanced systems, processes and controls.
Based on IOSCO’s recommendations, the Code sets out six principles for ESG ratings and data products providers:
- Good Governance: Ensure appropriate governance arrangements are in place that enable them to promote and uphold the principles and overall objectives of the Code
- Securing Quality (Systems and Controls): Adopt and implement written policies and procedures designed to help ensure the issuance of high-quality ESG ratings and data products.
- Conflicts of Interest: Adopt and implement written policies and procedures designed to help ensure decisions are independent, free from political or economic interference, and appropriately address actual or potential conflicts of interest that may arise from, among other things, organizational structure, business or financial activities, or the financial interests of the providers and their officers and employees.
- Transparency: Make adequate levels of public disclosure and transparency a priority for their ESG ratings and data products, including their methodologies and processes to enable the users of the product to understand what the product is and how it is produced, including any potential conflicts of interest and while maintaining a balance with respect to proprietary or confidential information, data and methodologies.
- Confidentiality (Systems and Controls): Adopt and implement written policies and procedures designed to address and protect all non-public information received from or communicated to them by any entity, or its agents, related to their ESG ratings and data products, in a manner appropriate in the circumstances.
- Engagement (Systems and Controls): Regularly consider whether their information gathering processes with entities covered by their products leads to efficient information procurement for both the providers and these entities. Where potential improvements to information gathering processes are identified, consider what measures can be taken to implement them. Where feasible and appropriate, respond to and address issues flagged by entities covered by their ESG ratings and data products and by users while maintaining the independence and integrity of these products.
In the first half of 2023, the UK government consulted on whether and how the FCA’s regulatory perimeter should be extended to include ESG ratings providers. The FCA continues to work closely with the government as it considers its next steps. The Code will provide a benchmark for any providers that fall outside the scope of potential future regulation.
