The Treasury has released a consultation on regulating environmental, social and governance (ESG) ratings.
This consultation came about as the Treasury recognised the growing reliance on unregulated ESG ratings providers.
These shape the performance of investments and the credibility of the sustainable investment market.
The Treasury said there is a clear benefit to be gained from improving the governance of ESG ratings providers.
In the preface to the consultation Treasury lords minister Joanna Penn said that the importance of reliable ESG information is “critical and growing”.
Projections show that $33.9trn (£27.5trn) of global assets will consider ESG factors within three years.
Penn added ESG ratings should be supported as their work promotes transparency and delivers strong outcomes for the benefit of UK markets.
If the Treasury extends the regulatory perimeter to include ESG ratings providers, then the FCA would be expected to conduct a cost benefit analysis.
And to consult on any new requirements for these providers, following its normal processes.
A core proposal set out in the consultation is that this ESG rating system is brought into regulation.
The Treasury also guides the government’s thinking about ESG ratings and data.
In December 2022, chancellor Jeremy Hunt announced as part of the Edinburgh Reforms that the government wants to improve transparency and promote good conduct in the ESG ratings market.
In 2020, it was found that 65% of institutional investors were found to use ESG ratings at least once a week.
Also, the government has updated its 2019 Green Finance Strategy that it claims reinforces ambitions for the UK to be a global leader in green finance.
Responding to the government’s updated Green Finance Strategy, FCA chief executive officer Nikhil Rathi said: “We welcome this updated Green Finance Strategy, which represents an important milestone, building on collective efforts to date and setting out a clear plan for the future.
“We are working hard to ensure that the UK market is well positioned to support the transition to net zero. We’re playing our part in delivering a world-leading framework for transition plan disclosures through our collaboration with the UK Transition Plan Taskforce.”
Bank of England governor Andrew Bailey added: “Climate change affects our planet, our economy and our financial system. It is undeniably relevant to the BoE and the objectives it is tasked to meet.
“We are working to ensure that the macroeconomy, the financial system, and the BoE itself are resilient to the risks from climate change and support the transition to net-zero.”
These developments comes as the FCA has said “it is refining” some of the “specific criteria” for ESG funds labels.
In an update on 29 March the regulator delayed the introduction of Sustainability Disclosure Requirements (SDR) for asset managers.
The roll out of the rules has moved from Q2 to Q3 and are being relaxed so more funds can be included in the labelling system.
Those include the launch of sustainable investment labels and disclosure requirements.
The SDR consultation closed on 25 January 2023 and it received around 240 written responses.
Quilter Cheviot head of responsible investment Gemma Woodward said: “Firms offering ratings on environmental, social and governance factors have grown rapidly in recent years, and the differences in the methodologies behind these ratings can be problematic.
“It is therefore a real positive to see the government taking a step forward in its assessment of whether to bring them into the regulatory regime with a consultation on what that might look like.”
Comments