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.
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 the Code of Conduct for ESG Ratings and Data Products Providers. The code focuses on promoting transparency, good governance, management of conflicts of interest, and strengthening systems and controls in the sector.
Background
The FCA appointed the ICMA and IRSG to convene an industry group, the ESG Data and Ratings Code of Conduct Working Group (DRWG), to develop a globally consistent voluntary code for those providing the third-party data and ratings increasingly relied upon by the market. The DRWG published in 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.
UK - ESG ratings providers
HM Treasury - Future regulatory regime for ESG ratings providers
In November 2024, the HM Treasury published the consultation response to its consultation on the Future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers, published in early 2023.
The consultation sought views on:
- The introduction of regulation for ESG ratings providers
- Description of ESG ratings and their provision
- Activities to exclude from regulation
- Sectoral and territorial scope of regulation
- Making regulation proportionate
The consultation response sets out the details of the scope of the regulatory regime, including what activities will be captured, and this is then translated into draft legislation. The consultation response is accompanied by a draft Statutory Instrument (SI) on which the government would welcome technical comments by 14 January 2025. The draft SI focuses on the regulated activity and exclusions, while work continues on other aspects such as transitional provisions, consequential amendments and market access routes for certain overseas providers. The government will finalise the legislation next year and the FCA will then consult on the specific requirements. The overall process of designing, developing and commencing the ESG ratings regulatory regime is expected to take approximately four years, with the government aiming to lay the requisite secondary legislation before Parliament in early 2025. Following this, the FCA will develop and consult on policy proposals, building in feedback to finalise the ESG ratings regime. Affected firms will then go through the authorisations process.
FCA - ESG integration in UK capital markets
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.
AREF's Public Policy Committee and ESG & II Committee will monitor the implementation of legislation and regulation for the ESG ratings regulatory regime.
EU - ESG ratings market and providers
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 - ESG rating providers
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.
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