introduction
The ESG ratings and data market has grown exponentially in recent years due to the growth of the sustainability market and the need for investors to understand the climate risks and sustainability impacts of companies and investments. ESG ratings and data providers are thus becoming increasingly influential in capital markets. However, a lack of reliable sustainability data, ‘black box’ methodologies and potential conflicts of interest have cast doubt on the credibility of ESG ratings, prompting the International Organization of Securities Commissions (IOSCO) to take action. .
IOSCO published a set of principles for securities regulators, ESG ratings and data providers in November 2021 ( Final recommendations) and many voluntary codes of conduct are modeled on these final recommendations. Code has been developed (or is being developed) in Japan, Singapore, India, South Korea, Taiwan, and Hong Kong. The European Union has published draft regulations on the transparency and integrity of ESG rating activities, and the UK has announced that ESG rating providers will be brought within the regulatory purview of the UK Financial Conduct Authority (FCA), where they will assess ESG factors. confirmed. To influence investment decision objectives and capital allocation.
Following the UK Code launch event held at the London Stock Exchange on 31 January 2024, we will share some of the insights from regulators in the UK, Japan and Singapore.
England
On December 14, 2023, the Code of Conduct for ESG Ratings and Data Product Providers was published. The Code was commissioned by the FCA and developed by the International Capital Markets Association (ICMA) and the International Regulatory Strategy Group (ISRG) for use in the UK and internationally. See this article for more information.
Japan
Japan’s Financial Services Agency (Japan’s FSA) was the first regulator to publish a code of conduct for ESG ratings and data providers on 15 December 2022. One of the reasons for the swift publication of the Code was that the FSA’s Chief Sustainable Finance Officer – Chair of the IOSCO workstream that produced the final recommendations.
Singapore
Monetary Authority of Singapore (trout) published its Code of Conduct for ESG Ratings and Data Product Providers on December 6, 2023. ICMA has been asked to host a list of providers that have adopted the Code of Conduct and the Singapore Code of Conduct. One way the MAS Code of Conduct differs from the Japanese and UK Codes of Conduct is that it recommends third-party assurance of checklists to confirm certification (in line with IOSCO’s Call to Action document).
Promoting interoperability between codes
Many ESG rating agencies and data providers are international organizations. Interoperability of norms in different jurisdictions is therefore essential for markets to function. The Japanese, UK and Singapore codes of conduct therefore appropriately implement his IOSCO Final Recommendations in their respective jurisdictions. We have also collaborated with each other and with other regulators to achieve maximum interoperability between codes.
Compliance with the Japan, UK, and Singapore codes is voluntary. ESG rating agencies and data providers are required to annually produce a certificate confirming their degree of compliance. In the UK and Japan, the format of the certificate is not specified. The MAS is a process for entities to complete that separately identifies the good practices outlined in IOSCO’s Call to Action and additional Singapore-specific best practices to facilitate interoperability with codes of conduct in other jurisdictions. We provide a checklist of things to do.
ICMA is also acting as the secretariat for the development of the Hong Kong ESG Ratings and Data Code of Conduct Working Group, which may enhance the interoperability of the developing Hong Kong Code. The draft Hong Kong ESG Ratings and Data Code of Conduct is expected to be released in Q1 2024, approximately three months after the first meeting.
Users should do their due diligence ESG ratings
Neither the UK, Singapore nor Japan regulators monitor compliance with the relevant codes of conduct. ESG rating agencies or data providers must annually upload their certificates to the ICMA website (for the UK and Singapore) or the Japan Financial Services Agency website (for Japan). Japan’s Financial Services Agency performed several analytical checks on already uploaded Japanese certificates, but the quality of the certificates varied widely.
Users of ESG ratings should ensure that they perform due diligence on ESG rating providers. Collaboration with ESG ratings and data providers is essential to understand the source of the data, the purpose of his ESG ratings provided, and the methodology. Only by asking questions to the provider can the user find out what kind of product he is buying and whether it will suit his purposes. It is also worth the user to check the certificate to ensure that it is up to date and that they are satisfied with the quality and content of the responses.
What’s next? How to increase voluntary norms and regulations?
ESG rating agencies are also on the verge of becoming obligated to comply with regulations.
In the EU, a compromise proposal regarding the Draft Regulation on Transparency and Integrity of Environmental, Social and Governance (ESG) Assessment Activities (2023/0177(COD)) (dated February 9, 2024) was published on February 14, 2024. It was done. This reflects the outcome of the interim political agreement reached by the Council with the European Parliament on 5 February 2024.
These regulations are broader than voluntary codes of conduct and require ESG rating agencies to be accredited by the European Securities and Markets Authority (ESMA). Rating agencies must comply with transparency requirements (such as disclosure of rating methodologies and data sources) and must keep their business activities separate to avoid conflicts of interest (unless exceptions apply).
If a composite ESG rating is provided, the weighting of the E, S, and G factors must be clearly stated. It is also possible to evaluate E, S, and G separately. Click here for more information on the proposal. Interim political agreements require approval by the Council and Parliament before going through the formal adoption process. This regulation will begin to apply 18 months after it comes into force.
In the UK, Treasury’s consultation on the future regulatory regime for ESG rating providers ended on 30 June 2023. On 6 March 2024, the Treasury confirmed that it will regulate ESG ratings when the assessment of ESG factors is used in investment decisions and affects capital. allocation. A full consultation response and legislative schedule will be published later this year. This topic is also likely to be considered in the Transition Financial Markets Review, which is expected to report to the government by July 2024.
