FCA Sees 'Clear Rationale' for Stronger Regulation of ESG Data Providers

UK's Financial Conduct Authority signals that stronger regulatory oversight of ESG markets could be in the offing in response to growing "greenwash" concerns.

The UK's Financial Conduct Authority (FCA) has said there is a "clear rationale" for it to provide regulatory oversight of "certain ESG data and rating providers", amid growing concerns over 'greenwashing' in the financial sector.

In its ESG integration in UK capital markets feedback statement this week, the regulator noted there was broad agreement across the industry regarding the harms caused by potentially misleading environmental and sustainability claims as to the role of environmental, social and governance (ESG) data and rating providers continues to grow.

Concerns noted by the FCA include a potential lack of transparency, poor governance controls, potential conflicts of interest, insufficient engagement with companies, and the high cost of data requests.

Currently, the regulator remains at the proposal stage for any putative ESG regulation, with the agency weighing suggestions that investment products should be required to apply "appropriate due diligence on any sustainability-related data, research or other analytical resources that it relies upon".

It also suggested "further steps" to extend such expectations to third-party data and rating services could be considered.

The FCA noted that as the UK government was also considering bringing these parties under its regulatory purview, it remains closely engaged with the Treasury on the topic.

A potential regulatory oversight model could see the FCA account for provider size, the degree of "judgement and 'value-added'" in service provision, and the usage of a provider's services in the marketplace.

It would aim for this approach to enhance transparency and promote strong governance, conflicts management and systems and controls, it said.

Given the potential lead time for such a regime, the FCA also said it would take on board the recommendations of the International Organisation of Securities Commissions and work with the Treasury to introduce an interim voluntary code of conduct.

However, on the question of establishing a UK green bond standard, the regulator kicked the issue into the long grass as it reported there was "mixed feedback" and would, therefore "continue to engage with market participants and relevant stakeholders".

Source: Business Green

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