UK regulator announces code of conduct for ESG products

The announcement follows the UK regulator decision to support the introduction of regulatory oversight of certain ESG data and ratings providers announced in its Feedback Statement on ESG integration in UK capital markets (FS22/4) released in June 2022, as this would support greater transparency and trust in the market for ESG data and ratings services.

The FCA said it is committed to 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 - these include transparency, good governance, management of conflicts of interest, and systems and controls.

The primary objective set by the FCA for the code is to be a globally consistent set of standards addressing the transparency on methodologies, data and procedures; good governance and management of the conflicts of interests between parties, ensuring methodologies stay consistent and that there are sufficient resources and competent personnel; sound management of conflicts of interests to identify, mitigate, manage and disclose conflicts of interests - for example where an entity they are rating is also paying them for consultancy services on ESG-related matters; and robust systems and controls including policies and procedures around methodologies, processes for reporting complaints and misconduct, and for engagement with rated entities.

In addition, the regulator said that by establishing best practices on transparency, governance, systems and controls, and management of conflicts of interest, the code will improve the availability and quality of information provided to investors at product and entity levels; enhance market integrity through increased transparency, good governance and sound controls, and improve competition through better comparability of products and providers.

Coordinated Approach

The regulator expects the code to be generally welcomed by investment product providers as it will lead to a globally coordinated approach, and to a greater standardisation of ESGrelated information flowing through investment chains and in the market more widely.

Divergence of UK standards with other competing codes around the world such as the one developed by the German Derivatives Association (DDV) could otherwise be a hurdle for the UK code's take-up for many of those ESG data and ratings providers with an international footprint.

The briefing paper the FCA gave to the working group of industry experts emphasises the need to develop the code in a proportionate manner.

The regulator is asking the working group to have regard to the different sizes and capabilities of ESG data and ratings providers, as well as to consider the size and capabilities of the entities that are rated.

The working group is co-chaired by M&G, Moody’s, London Stock Exchange Group (LSEG) and Slaughter and May, and is composed of stakeholders including investors, ESG data and ratings providers, and rated entities. The group will aim to meet for the first time later this year.