‘Green Day’: Treasury launches consultation on ESG ratings providers

The proposals for the ‘Future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers’ were announced today (30 March), on what the government has called Energy Transition Day (more widely dubbed ‘Green Day’), as part of the revamped Net Zero Strategy.

In the consultation paper, the Treasury noted that 65% of institutional investors were found to use ESG ratings at least once a week in 2020.

Baroness Penn, Treasury minister, said: “With projections that $33.9trn of global assets under management will consider ESG factors within three years, the importance of reliable ESG information is critical and growing. ESG ratings are a key element of this.”

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The government previously said it would consider bringing ESG ratings and data providers into the regulatory perimeter in its Greening Finance: A Roadmap to Sustainable Investing paper, published in 2021. The Treasury noted that while it would set the new legislation, it would be regulated by the FCA and the PRA.

The FCA has previously asked market participants about the case for regulatory oversight of ESG ratings and ESG data providers in a consultation paper on climate-related disclosures and ESG in capital markets, concluding that it “sees a clear rationale for regulatory oversight of certain ESG ratings and data providers when their products are used in financial markets”.

If the Treasury extended the regulatory perimeter to include ESG ratings providers, the FCA would be expected to conduct a cost-benefit analysis and to consult on any new requirements for these providers, today’s government paper stated.

The FCA has previously said that if the Treasury extends its regulatory perimeter, it will take the necessary steps to develop and consult on a proportionate and effective regulatory regime, with a focus on outcomes in areas highlighted in the International Organization of Securities Commissions’ (IOSCO) recommendations on ESG data and ratings providers.

These include transparency, good governance, management of conflicts of interest, and systems and controls. The watchdog has also created a working group to develop a voluntary code of conduct for ESG data and ratings providers.

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An FCA spokesperson said: “We have said that we see a strong rationale for regulatory oversight of ESG ratings providers and for globally consistent regulation. This will improve confidence in the market and support the transition to net zero.

“We welcome today’s announcement and will continue to work with the government on the next steps – with a focus on transparency, good governance, managing conflicts of interest, and robust systems and controls.”

Last week, the FCA warned major ESG benchmark administrators of regulatory action due to the “potential for widespread failings”  identified as part of a preliminary regulatory review. 

The “Dear CEO” letter followed communications from September last year, regarding the FCA’s “particular concerns” of “subjective” ESG benchmarks’ methodologies and disclosures. These concerns then prompted the subsequent review.