UK government steps closer to regulating ESG rating firms

As part of last week’s ‘Edinburgh Reforms’ announcements, Jeremy Hunt unveiled the UK government will consult on bringing Environmental Social and Governance (ESG) ratings providers into the UK’s regulatory perimeter.

The move was widely welcomed by the financial services industry in order to ensure transparency and good market conduct as ESG becomes an increasingly important part of investment decisions. 

Additionally, HM Treasury will join the working group responsible for developing a code of conduct around ESG data and ratings.

The FCA has previously expressed support for the change, as well as a “globally coherent” approach in line with recommendations around transparency, good governance, robust systems and controls and sound management of conflicts of interest from the International Organisation of Securities Commission (IOSCO).

Unmet transparency expectations

Though ESG ratings are increasingly embedded within investment processes, the FCA recently highlighted that there is a very little consistency between different providers’ ESG ratings on any given entity. This is driving a great deal of global scepticism over ESG disclosures, jeopardising long term market confidence.

Experts have gone as far as labelling ratings as ‘opinions’ due to their inherently subjective nature. Bringing different ratings methodologies under one regulatory regime may reduce concern over a lack of transparency on ESG definitions.

Additionally, greater regulation could create opportunities for asset managers as they strive to incorporate more sustainable investing practices into their portfolios. 

The proposed regulation of ESG rating providers could be an important step forward in ensuring scores are based on accurate and reliable data. For asset managers this could mean better returns, as well as greater protection against potential risks associated with investing in companies with low sustainability scores. 

We very much hope these plans, as well as an updated Green Finance Strategy, kick start 2023 with considered and meaningful net zero intentions that are able to deliver real world change!

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