On the go: The Financial Conduct Authority has expressed its support for the regulation of environmental, social and governance data and ratings agencies after consulting the industry.
In a feedback statement released on June 29, the FCA said it supported the government’s consideration of bringing the oversight of these products and services under the regulatory umbrella.
The city watchdog said this would contribute to its overarching aims, which are to protect consumers and the integrity of the UK financial system, as well as promoting effecting competition in the interests of consumers.
Sacha Sadan, director of ESG at the FCA, said the focus of the regulator’s ESG strategy is to build trust and integrity in financial instruments and products that are sold as sustainable.
“As our recent discussion with industry and other stakeholders shows, that requires close international co-operation on standards and actions right across the market,” he said.
“We would support a future regulatory regime in line with international recommendations.”
As industry participants more fully integrate ESG into their activities and expand their ESG-focused product offerings, they are increasingly reliant on third-party ESG data and ratings services, the regulator said in its statement.
It added that these services are becoming increasingly embedded within investment processes, directly influencing capital allocation.
Most respondents to the request for feedback supported an increase in regulatory oversight.
The FCA also acknowledged that there is a very low correlation between different providers’ ESG ratings on any given entity, but indicated that it does not think this is a potential issue for the industry.
This reflects the “inherent multidimensionality of ESG”, it said, as well as the always-improving methodology.
Despite this, the watchdog said it does not consider these differences a source of harm, as long as the providers are transparent about their methodology and the data they use, have robust governance, manage conflicts of interests, and have systematic processes and controls.
The FCA and the Treasury will have to undertake a consultation before implementing any regulations, and the regulator said it will seek to align itself with the International Organization of Securities Commissions’ recommendations released last year.
“We see value in co-ordinating as far as possible with other jurisdictions on the design of any regulatory approach or voluntary code of conduct,” it added.
This article first appeared on FTAdviser.com
