Ministers of the UK government are equipped with formal proposals to regulate agencies that evaluate the environmental, social, and governance performance of companies. On the latest in a global crackdown on the sustainable ratings industry, the government intends to divulge its proposals as early as January next year after a three-month consultation that ended in June. A large unregulated sector that wields broad influence over trillions of pounds worth of sustainable investments is the primary distress that’ll be addressed in the proposals.
Meticulous Oversights in the ESG Ratings Industry
Many organizations create ESG criteria and rate other companies against them. These ratings influence and become a deciding factor of the stocks and bonds making it into investment funds that are marketed as sustainable. There has been a slight oversight in the means indulged by these companies. A concerned party involved has said that the Treasury is yet to decide whether regulating ESG agencies will require fresh legislation, or if it is achievable through the strategies executed under the existing laws.
Moreover, they cautioned that the government is analyzing the consultation responses currently. Interestingly, they have not ruled out a proposal to create a new watchdog as it is to be believed that the expansion of the remit of the Financial Conduct Authority is considered the most viable option.
UK’s Treasury and the FCA in the Spotlight!
In the upcoming days, the Treasury has decided to publish a government response to its consultation on a potential regulatory regime for ESG rating providers. A spokesperson from the FCA stated that they are lending support to the government on their consultation for a regulatory regime for ESG rating providers. This game plan from Britain to regulate the sector comes after the European Commission proposed new rules in June for the ESG rating providers.
Various measures were proposed by the Commission to separate ratings groups’ provision of data services from their consultancy arms. In addition, measures were undertaken to ask them to disclose more methodological details along with registering with the authorities formally. The FCA has been continuously encouraging the industry to adopt a voluntary code of conduct that is currently under development, partly due to the various factors that determine the uncertainty about its formal powers.
The FCA instigated to create a working group that would be publishing the voluntary code for ESG data and rating providers next month. Back in July, a draft version of the code was published that said providers should disclose measures they are taking to avoid conflicts of interest and to publish extensive details of their methodologies, among other reforms.
In July, Sacha Sadan, Head of Environmental, Social and Governance Issues at the UK’s FCA, stated that the code has been developed keeping in mind international consistency. When asked about curbing the ESG data providers, Sadan responded that they’re not waiting for a crisis to occur and that the industry has been developing at an alarming rate.
The Concerns and Speculations Regarding ESG Ratings Industry
Ever since in 2021 when the International Organization of Securities Commissions ordered all the financial regulators around the world to consider “focusing more attention” on providers of ESG ratings and data, pressure has been mounting up on the lucrative market for sustainability data. After extensive discussions in the country, it has been made clear as a day that regulations are welcomed if they maintain consistent and transparent methods along with ensuring an appropriate level of independence among the providers. In addition, the regulations should also provide flexibility to allow for innovation to meet the needs of emerging markets.