14 Dec 2023

The use of environmental, social and governance (ESG) ratings and data products has grown considerably in response to investors’ mounting interest in investing in companies that take account of sustainability in the way they are run. As a result, the role and influence of ESG ratings and data products providers in financial markets more generally, and in the sustainable finance ecosystem more specifically, have grown significantly. This has led some securities markets regulators to take a closer interest in the activities and business models of these providers.


ICMA & IRSG - Code of Conduct for ESG Ratings and Data Products Providers

In December 2023, the International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) launched their Code of Conduct for ESG Ratings and Data Products Providers. The FCA had appointed the ICMA and IRSG to convene an industry group to develop a globally consistent voluntary code for those providing the third-party data and ratings increasingly relied upon by the market. The code focuses on promoting transparency, good governance, management of conflicts of interest, and strengthening systems and controls in the sector.

FCA - Code of Conduct for ESG ratings and data providers

The ESG Data and Ratings Code of Conduct Working Group (DRWG) published on 5 July 2023, for a 3 month consultation, a Draft Voluntary Code of Conduct for ESG Ratings and Data Product Providers. More details about DRWG can be found on the FCA's website.


HMT - Future regulatory regime for ESG ratings providers

In March 2023 HM Treasury published a 3 month consultation on the Future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers. They were consulting on whether regulation for providers of ESG ratings should be introduced, and on the potential scope of a regulatory regime.

HMT were intending to capture a wide range of ESG ratings used in financial markets, regardless of their name or how they are marketed. They proposed that an ESG rating in the context of a new regulated activity would cover an assessment regarding one or more ESG factors, whether or not it is labelled as such. HMT’s proposed scope excluded data on ESG matters where no assessment is present. Therefore, the provision of raw ESG data, where there is no assessment, would not fall under the regulatory regime.

AREF's Public Policy Committee and ESG & II Committee are monitoring the outcome of this consultation.


EC - ESG ratings market 

On 4 April 2022 the European Commission launched a targeted consultation on the functioning of the ESG ratings market in the European Union and on the consideration of ESG factors in credit ratings. This consultation will help the Commission gain a better insight on the functioning of the market for ESG ratings, as well as better understand how credit rating agencies (CRAs) incorporate ESG risks in their creditworthiness assessment. Responses from market participants will feed into an impact assessment that will evaluate whether a possible policy initiative on ESG ratings and on sustainability factors in credit ratings is needed. The deadline for responding to the consultation was 6 June 2022.


ESMA - Call for Evidence

On 24 June 2022 ESMA provided the European Commission with the outcome of its call for evidence on the market characteristics for ESG Rating Providers in the European Union (EU).

This call for evidence sought to develop a picture of the size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU. The feedback ESMA received on the market for ESG rating and data providers is indicative of an immature but growing market, which, following a number of years of consolidation, has seen the emergence of a small number of large non-EU headquartered providers. In addition, there are a large number of smaller more specialised EU entities. 


IOSCO - ESG Ratings and Data Products Providers

Following on from their consultation in July 2021 (AREF’s response to the consultation), IOSCO published in November 2021 their Final Report and recommendations on ESG Ratings and Data Products Providers. 

The Report is structured around five chapters:

  • Chapter 1 provides an overview of the market for ESG ratings and data products;
  • Chapter 2 discusses the current practices of ESG ratings and data products providers;
  • Chapter 3 discusses observations in relation to users of ESG ratings and ESG data products;
  • Chapter 4 elaborates on the interactions between companies that are the subject of ESG ratings or data products and ESG ratings and data products providers; and
  • Chapter 5 discusses areas for improvement and sets out recommendations for securities markets regulators, ESG ratings and data products providers, users of these products and services, and companies subject to these providers’ review.

In November 2022 IOSCO published a Call for Action for all voluntary standard setting bodies and industry associations operating in financial markets to promote good sustainability practices among their members to counter the risk of greenwashing related to asset managers and ESG rating and data providers. 


FCA consultation 

In the FCA consultation CP21/18, published in the summer of 2021, there were discussion topics on ESG integration in UK capital markets; this included a section on ESG data and rating providers. As the issues raised in the consultation could have a significant market effect for both the listed and unlisted funds holding underlying real estate AREF sent a response to the questions within this section. 

In late June 2022, the FCA published a Feedback Statement (FS22/4) on ESG integration in UK capital markets. The FCA think that greater regulatory oversight of providers of ESG data and ratings is needed to promote good governance and transparency. They also see a clear rationale for a globally consistent regulatory approach informed by IOSCO's recommendations on ESG data and ratings. They are therefore working with the Treasury, which is considering bringing these providers within the FCA’s remit.

Author

Jacqui Bungay

Jacqui Bungay

Head of Policy and Company Secretary, AREF

Jacqui is AREF’s Company Secretary and provides policy guidance and secretariat services to AREF’s Board and Management Committee as well as many of AREF's committees and working groups.

Jacqui joined AREF in 2014 after working for over 25 years in fund compliance, client relationships and administration in the trustee and depositary sector.