News

FCA calls out ESG ratings providers

FCA, calls out, ESG, ratings, providersThe UK’s financial watchdog has criticised ESG benchmark administrators over the poor quality of their disclosures relating to ESG ratings and warned that they might be subject to regulation in the future.

A letter sent to the administrators by the Financial Conduct Authority (FCA) highlighted a number of issues, including a lack of detail on benchmark methodologies; a lack of accessibility or explanation on the underlying methodologies of benchmarks used to create ESG ratings; not fully implementing ESG disclosure requirements; and using outdated data and failing to apply ESG exclusion criteria.

The letter comes on the back of a preliminary review of ESG benchmarks carried out by the FCA over the last six months.

The regulator’s concern is that the poor quality and lack of transparency around ESG benchmarks will only raise the prospect of greenwashing and adversely affect investor confidence in ESG-labelled products.

“We expect all benchmark administrators to have strategies to address the issues identified in this letter,” stated the FCA. “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.”

The letter added that the regulator is supportive of efforts to introduce a voluntary code of conduct for ESG data and ratings providers. More importantly, though, the FCA is also considering ways to extend its supervisory powers to include ESG rating providers.

The FCA’s actions come at a time when data providers are facing greater scrutiny from regulators.

ESG index providers have also come under the spotlight since the introduction of the Sustainable Finance Disclosure Regulation (SFDR), which has forced several providers to tighten their policies and adjust their metrics.

For example, FTSE Russell recently announced that it would exclude companies without ESG scores from one of its climate-focused indexes, while MSCI made similar changes to one of its own ESG indexes.

In both cases, major asset managers such as Invesco, DWS and BlackRock found their ESG-screened ETFs were affected and had to be downgraded from either article 8 or 9 status under the SFDR.

© 2023 fundsTech