Morningstar Sustainalytics calls for principles-based regulatory approach

Pardon the Interruption

This article is just an example of the content available to mallowstreet members.

On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.

All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.

Morningstar Sustainalytics has argued regulation for ESG data and rating providers should be principles-based to avoid obstructing innovation.

The ESG ratings provider’s comment came as the Financial Conduct Authority last week agreed with the government that such firms should be brought within its regulatory remit.

“We see a clear rationale for regulatory oversight of certain ESG data and rating providers,” the FCA has said in a statement.

It added: “If the Treasury extends our regulatory perimeter, we will take the necessary steps to develop and consult on a proportionate and effective regulatory regime for ESG data and rating providers.”

Given the potential lead time before any regime could come into force, the FCA said in the interim, it would support industry participants to develop and follow a voluntary Code of Conduct to address the problem.

The FCA said: “We would consider whether such a voluntary Code could continue to apply for ESG data and rating providers that fall outside the scope of any future regulatory regime.”

Would regulation hinder innovation?
Arthur Carabia, ESG policy research director at Morningstar Sustainalytics, said the company welcomed the two-stage approach, first the voluntary code of conduct and then regulation, but he added: “The focus on ESG ratings providers reflects the reality that sustainability research is playing an ever-increasing role in fund flows and is an integral part of investing.  With the ESG rating market still evolving, we believe adopting a fully-fledged regulation could potentially hinder innovation and create barriers to entry.”

Carabia called for a principles-based approach to regulate ESG data and ratings providers: “As such, we encourage regulators to take a principles-based approach, focusing on the transparency, quality, integrity and independence of ESG ratings. Ultimately, regulations should help investors use ESG ratings with confidence while allowing for diverse methodologies and fostering originality.”

Previously known as Sustainalytics, the company was acquired by Morningstar in 2020.

Meanwhile, rival firm MSCI also supports a voluntary code of conduct.

The company said: “MSCI has over 13 years of experience in assigning ESG ratings and operating to the highest standards of ethical conduct in our business operations.  We welcome the development of voluntary principles of conduct for ESG ratings that allow for global and domestic rating providers to offer a service to investors that addresses principles such as conflicts of interest management, transparency and consistent application of rating methodologies.”

Is a voluntary code of conduct developed by market participants suitable to regulate the sector?

More from mallowstreet