LONDON (Reuters) – Britain’s financial watchdog urged companies that rate other businesses’ sustainability efforts to sign up to a new voluntary code of conduct, ahead of possible regulations for an industry that channels hundreds of billions of dollars in investments.
The code of conduct was drawn up by the International Capital Market Association, a fixed-income trade body, and think-tank International Regulatory Strategy Group, following a request from Financial Conduct Authority (FCA) last year.
The market for rating companies’ environmental, social and governance (ESG) performance has boomed in recent years, with hundreds of billions of dollars in funds tracking indexes that exclude firms with low scores.
S&P Global, Moody’s, MSCI, the London Stock Exchange Group and Morningstar’s Sustainalytics are among the biggest sellers of the ratings.
“With its strong focus on international consistency, this industry-owned code will play a key role in increasing transparency and trust in the ESG data and ratings market,” Sacha Sadan, FCA director of ESG, said in a statement on Thursday.
Britain’s voluntary approach contrasts with the European Union, which this year unveiled a draft law to regulate ESG raters as part of a shake-up of the industry that is designed to improve trust and tackle greenwashing – or companies exaggerating their sustainability credentials.
The British code, which reflects recommendations from global securities watchdog IOSCO, covers governance of the raters’ systems and controls to ensure high-quality ratings. It also includes guidelines on managing conflicts of interest and transparency over methodologies.
The British government is expected to announce soon whether to expand the FCA’s remit to regulate ESG raters. The FCA said on Thursday it continued to work with the government as it considered its next steps.
Critics say ESG ratings methodologies are overly complex, opaque and tend to reward companies that disclose more information, rather than those that are best able to manage ESG risks, or do the best job in minimising the damage their businesses cause the planet.
(Reporting by Tommy Reggiori Wilkes; Editing by Sharon Singleton)