UK Treasury is considering to regulate the majore raters to stop the risk of greenwashing for investors in sustainable assets.

Adam Lyons, head of the Ministry’s green finance unit, recently announced that greenwashing, or unsubstantiated claims about corporate ESG credentials, was a serious problem in the financial markets. In order to reduce the possible risk for ESG investors, the Ministry will work this year together with the Financial Conduct Authority (FCA) and the raters to understand the issues affecting the sector and whether it should be brought inside the regulatory perimeter.

“The rationale is that it’s an increasingly important part of investment decision-making, but it’s currently totally unregulated,”

Adam Lyons, Head of green finance at the UK Treasury

regulate ESG rating agencies

ESG ratings providers, which rank companies’ performance based on ESG factors, have different methodology and use different ways to plug gaps in data, leading to little correlation between them. Combined with other features of ESG rating provision, there may be “potential for harm to market functioning, or to consumers, in some circumstances” according to the FCA, which already warned a year ago that the ESG ratings universe is in a need for a tighter oversight.

There has been a flurry of consolidation among companies that provide ESG ratings the past years. MSCI has acquired Innovest and KLD, Moody’s has bought Vigeo Eiris, Morningstar has taken over Sustainalytics, S&P Global completed an acquisition of RobecoSAM’s ESG ratings business in January 2020 and the London Stock Exchange Group completed its acquisition of Refinitiv last year.

“In terms of what that would look like, I think the first thing to say it’s definitely not being regulation focused on what the ratings are that ratings agencies are developing. It will be much more focused on ensuring proper practice, like declarations of conflicts of interest, for example … it’s much more about transparency.”

Adam Lyons, Head of green finance at the UK Treasury

regulate ESG rating agencies

Policy options include guidance for firms on using ESG data and ratings, a best practice code for ESG data and rating providers, and introducing regulation of ESG data and raters, which has already been suggested by regulators in the European Union

Global securities regulatory body IOSCO also suggested last year that national watchdogs should consider regulating ESG raters, which have become more important as investors demand more ESG-related data on companies.

Britain wants to become the world’s first net-zero aligned financial centre, offering expertise in green finance.

In April it became the first major economy to make climate-related company disclosures mandatory for more than 1,300 companies, in line with the global Taskforce on Climate-related Financial Disclosures (TCFD).

The International Sustainability Standards Board -ISSB – leads by Emmanuel Faber, ex CEO of Danone, is drafting what it aims to be the world’s first baseline sustainability disclosure standards for companies, building on the TCFD. Right now, the proposals – exposure drafts- build upon the recommendations of the Task Force on Climate-Related Financial Disclosures and incorporate industry-based disclosure requirements derived from SASB Standards.When the ISSB issues the final requirements, they will form a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors in assessing enterprise value.

“We very much see the TCFD mandatory standards that we have in place being replaced by the ISSB standards,”

Adam Lyons, Head of green finance at the UK Treasury

regulate ESG rating agencies

Article: Joana Foglia – Source : Reuters, ISSB