FCA: ‘Clear rationale’ for bringing ESG data firms into regulatory remit

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The Financial Conduct Authority has said it agrees with government that ESG data and rating providers should be brought into its regulatory perimeter. Meanwhile, it said it will take a “measured approach” to ESG-labelled debt. Are market participants ready for ESG regulation? 
The FCA has on Wednesday published a feedback statement entitled ‘ESG integration in UK capital markets’, saying environmental, social and governance data and rating providers should be in its remit.  
“We see a clear rationale for regulatory oversight of certain ESG data and rating providers,” the FCA has said, believing that common baseline standards would allow the UK to be a global leader in this area, a view shared by the Treasury. 
A “globally consistent regulatory approach informed by the recommendations on ESG data and ratings developed by the International Organization of Securities Commission (IOSCO) in 2021” is therefore favoured by the FCA. 
If the Treasury does extend its regulatory perimeter, there will be a consultation on a “proportionate and effective” regulatory regime for ESG data and rating providers. 

Greenwashing risks undermining trust in market 

The FCA said market participants and consumers must be able to trust green and other ESG-labelled financial instruments and products. One of the key outcomes of its ESG strategy is to promote integrity in the market for ESG-labelled securities, supported by the growth of effective service providers – including providers of ESG data, ratings, assurance and verification services. 
Rating providers play a crucial role in legitimising ESG claims. Aneesh Raghunandan, an assistant professor of accounting at the London School of Economics, has previously argued that the ESG scores that firms are given by rating agencies have no correlation to their actual behaviour.  
Greenwashing is a growing concern as asset owners and retail investors increasingly seek products promising to take into account ESG factors. Asoka Woehrmann, the chief executive of German asset manager DWS, recently resigned after police raided the firm’s Frankfurt offices over greenwashing claims, while earlier this year, HSBC was accused of misleading customers about its green credentials by the UK’s advertising watchdog.  

Standards adoption remains voluntary for ESG debt issuers 

Despite its stated desire to do more on ESG, the FCA is not requiring issuers of ESG-labelled debt instruments to adopt any standards at this point. The watchdog said it is “taking a measured approach... with the aim of setting clear guard-rails as the market continues to develop”.  
In a bulletin published alongside the feedback statement, it sets out its approach, explaining it would “encourage issuers of ESG‑labelled [use-of-proceeds] debt instruments to consider voluntarily applying or adopting relevant industry standards, such as the Principles and Guidelines that the International Capital Market Association (ICMA) has developed for green, social, and sustainability bonds”. 
It also reminded issuers, their advisers and others to ensure that adverts are not inaccurate or misleading. Issuers of ESG debt and their advisers should consider verifiers’ and assurance providers’ expertise and professional standards, it added. 
The feedback statement published on Wednesday relates to a consultation issued a year ago. Separately, in November last year, it published a discussion paper about requirements for planned sustainability disclosures, announced by the Treasury last year. 

How will regulation of ESG data and rating providers change the market? 

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