Posted: 5 Jul 2023 Resource Type: Thought Piece Back A voluntary code of conduct is a stepping stone in developing regulatory standards for ESG ratings. Furthermore, voluntary commitments have a role in raising standards now – without the need to wait for regulation to catch up with practice. The UK is helping to lead the way globally with the launch of a new code which will see providers enhancing their credibility and transparency. When Rishi Sunak was Chancellor he set the challenge for the UK to be the world’s first net zero aligned financial centre. Raising standards on ESG data and ratings is an important part of this ambition as it will help investors in the UK assess the sustainability of the firms they may invest in. Calls for greater clarity in ESG data and ratings As a result of the growing need for transparency in ESG products, ESG ratings and data products providers have come under greater scrutiny. Shareholders, investors, rated entities, and users are increasingly concerned with clear, high-quality, and reliable ESG ratings and data products. And there are widespread calls for closer regulatory oversight in the ESG market. The International Organization of Security Commissions’ (IOSCO) put out a call to action to address a lack of oversight. It has also encouraged the development of best practice policy in the form of legislative initiatives or the creation of codes of conduct. A code of conduct for ESG whilst regulation is considered Until regulation is established, a Code of Conduct can help improve trust in ESG products, especially those relevant to the financial services sector. It can guide investors in allocating their money to the right assets as well as alleviate the risk of greenwashing. HM Treasury is currently consulting on bringing ratings providers into the regulatory perimeter. But in the meantime, the FCA has tasked International Capital Market Association (ICMA) and the IRSG, which is co-sponsored by the City of London Corporation and TheCityUK, to develop an industry-led voluntary code of conduct for ESG ratings providers. The Code of Conduct is an interim solution before potential regulation comes in to play, and it and will inform any future regulation. The code will be internationally consistent, taking into account IOSCO’s recommendations. It seeks to create a comprehensive, coherent ESG ratings system that will enable investors to embed sustainable decisions more confidently into their businesses. The work currently underway in the UK could have global implications as regulators worldwide stand to use its framework to develop globally consistent and proportionate regulation. Today is an important step in increasing transparency and trust in the growing market for ESG data and ratings products. It’s also vital that the Code has been developed with international consistency in mind. We thank the Secretariat for their hard work and encourage everyone to take part in the consultation. Sacha Sadan, FCA Director of ESG The UK: an early leader in ESG ratings codes of conduct On Wednesday July 5th the ESG Data and Ratings Working Group (DRWG), convened by the IRSG and ICMA, released a draft Code of Conduct for consultation. This makes the UK one of the first countries in the world to develop a code of conduct for ESG ratings and data, after Japan. The ambition is that the new code will become a global resource, serving as a template to use in other jurisdictions. Overview of the Code of Conduct The Code of Conduct aims to foster a trusted, efficient, and transparent market, by introducing clear standards for ESG ratings and data products providers. Informed by IOSCO, the Code of Conduct sets out six best practice principles to address several key problems that exist in the system today: transparency, governance, systems and controls, and management of conflicts of interest. Good Governance Principle 1 calls for ESG ratings and data products providers to ensure appropriate governance arrangements are in place. This includes appropriate management of conflicts of interest, transparent procedures, as well as support competent personnel and sufficient resources. Systems and Controls Three principles, principles 2, 5, and 6, call for ESG ratings and data products providers to have sound systems and controls by adopting and implementing written policies and procedures. This will ensure a high quality of products, consistency and effective engagement practices helping users to make informed decisions. Conflicts of Interest Principle 3 calls for ESG ratings and data products providers to manage activities that may compromise the independence and objectivity of ESG ratings and data products providers’ operations. Establishing appropriate policies and procedures to address conflict of interests, mitigates the risk of undermining the independence, integrity, reliability, and credibility that informs the issuance of an ESG rating or data product. Transparency Principle 4 calls for adequate levels of public disclosure and transparency as a priority for ESG ratings and data products. Specifically, this includes greater transparency of methodologies and processes to support an increased understanding for users. At the same time appropriate levels of disclosure should maintains a balance with respect to proprietary or confidential information. How the ESG Code of conduct was developed In November 2022, ICMA and the IRSG convened the DRWG – an industry-led working group,. The DRWG brought together international stakeholders from the UK, the EU and the US representing ESG ratings and data products providers, rated entities, academics, and users such as asset managers, asset owners and banks. The FCA, the Bank of England and other relevant financial regulators and government departments sit as active observers on this group. The Code was developed by the four co-chairs from Moody’s, M&G, LSEG, and Slaughter and May, and the Secretariat and DRWG members. Members of the DRWG have worked hard to make sure the Code of Conduct is internationally consistent, primarily through close alignment with the International Organization of Securities Commissions’ recommendations but also through taking into account developments in jurisdictions such as Japan, Singapore and the EU. We hope the Code of Conduct will be a significant step in the development of consistent global standards for ESG Data and Ratings providers. Steering Committee (the four co-chairs) Have your say on ESG ratings draft code of conduct The Draft Code of Conduct is now out for consultation. It is essential that ESG ratings and data providers, users and rated entities and other interested stakeholders provide their feedback so we can build a framework that considers their needs. This will close on the 5th of October. Submissions can be made to drwgsecretariat@icmagroup.org. The IRSG and ICMA are due to publish the final Code at the end of 2023. Ultimately, the government might deem it necessary to implement a formal regulatory regime. But there is no need to wait for that. The Code of Conduct has a vital role to play in raising standards now. Find out more Draft Voluntary Code of Conduct for ESG Ratings and Data Product Providers Draft Voluntary Code of Conduct for ESG Ratings and Data Product Providers Comment FCA welcomes the Consultation FCA welcomes the Consultation Share: Share to LinkedIn LinkedIn Share to Twitter Twitter Share to Facebook Facebook Share to WeChat WeChat Share to WhatsApp WhatsApp Share to Email Email Related content Case Study Investing for the long term: boosting returns for pension savers Oct 2023 - UK pension savers are locked out of benefitting from the growth of firms in some of the UK’s most vibrant industries. At the same time, these dynamic, growing firms can have trouble accessing the capital they need to grow domestically. Investing for the long term: boosting returns for pension savers Thought Piece Synthetic data solutions: the regulator's progressive mission for combating APP fraud Sep 2023 - Synthetic data-sets provide a ground-breaking tool to help firms test and scale innovative solutions to combat fraud. The FCA and the City of London are delivering a synthetic data-set, focused on Automated Push Payment (APP) fraud solutions, to be hosted on the FCA’s permanent sandbox. Synthetic data solutions: the regulator's progressive mission for combating APP fraud Case Study Carbon Clean │ delivering industrial decarbonisation Sep 2023 - We spoke to Iain Tobin, Chief Corporate Officer at Carbon Clean, about the growing role carbon capture will play in combatting climate change. Carbon Clean │ delivering industrial decarbonisation Case Study Managed Funds Association ⏐ supporting alternative asset managers around the globe Sep 2023 - We spoke to Jillien Flores, Head of Global Government Affairs at the Managed Funds Association about growing demand for alternative investments and the UK's role there. Managed Funds Association ⏐ supporting alternative asset managers around the globe