The ESG Data and Ratings Working Group (DRWG), mandated by the Financial Conduct Authority has released a consultation paper to develop a voluntary code of conduct for ESG ratings and data product providers.
The code is a recognition to the important role that these firms are playing in the investment process as well as in response to the growing demands for tighter oversight regarding the quality, reliability and transparency over this cohort.
The consultation. which closed on 5 October2023, comprises six principles covering good governance, securing quality, conflicts of interest, transparency, confidentiality and engagement.
With each principle, the code recommends a set of actions that raters should take and describes outcomes that should be targeted.
The DRWG said they are aimed at “improving the availability and quality of information provided to investors at product and entity levels; enhancing market integrity through increased transparency, good governance and sound systems and controls; and improving competition through better comparability of products and providers”.
The code is built on recommendations made in 2021 by the International Organisation of Security Commissions (IOSCO), which said that ratings were too important for regulators to overlook.
Alongside recommendations on how ratings firms can improve their services, IOSCO suggested the firms be brought either under direct regulatory scrutiny or encouraged to follow voluntary codes of conduct.
The FCA appointed the International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) as the Secretariat for the group.
The DRWG is co-chaired by M&G, Moody’s, London Stock Exchange Group (LSEG) and Slaughter and May, and also includes investors, ESG data and ratings providers, and rated entities.
According to consultancy Opimas, the market for ESG data grew to about $1.3 billion last year, of which ratings and raw data providers accounted for 70% per cent with indices accounting for the remainder.
FCA director of ESG Sacha Sadan says that the draft code is “an important step in increasing transparency and trust in the growing market for ESG data and ratings products.
It is 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.”
©Markets Media Europe 2023
