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How regulated should the ESG ratings market be?

  • 1.  How regulated should the ESG ratings market be?

    Posted 05-07-2023 12:55

    An article in the FT yesterday 'Rating the ESG rating agencies' detailed academics responses to challenges facing the ESG rating agencies, and concludes that regulatory actions are needed to standardise reporting, maintain a competitive market, emphasise transparency, address conflicts of interest and refine methodologies.

    Today the ICMA and International Regulatory Strategy Group (IRSG)'s ESG Data and Ratings Working Group (DRWG) released a Draft Voluntary Code of Conduct for ESG Ratings and Data Product Providers for consultation. The 6 key principles include good governance, securing quality, conflicts of interest, transparency, confidentiality and engagement. Is this the answer the academics were looking for?

    Sacha Sadan, the FCA director of ESG, said "today is an important step in increasing transparency and trust in the growing market for ESG data and ratings products." The draft voluntary code's creator, the ESG DRWG, is chaired by M&G and Moody's, and its vice chairs are from LSEG and Slaughter and May. 

    On Monday, Indian regulators adopted official regulation for ESG ratings providers, among the first countries to adopt mandatory regulations.

    So my questions to you are: can a self-regulated model work? Do voluntary codes go far enough to increase trust in the market? How long until regulators step and and implement mandatory standards in UK ESG ratings markets? Interested to hear thoughts!



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    Katy Husband
    ESG Ratings Analyst
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  • 2.  RE: How regulated should the ESG ratings market be?

    Posted 06-07-2023 15:28

    Great questions and post Katy.  Answer to how long until regulators regulate UK ESG ratings - not long.  HM Treasury CP on regulating ESG ratings provider closed this week - the IA and PIMFA industry bodies have clearly called for not just regulating ESG Rating providers, but also ESG data providers given the importance of ESG related data being used by investors in investor decision making.  For further insight into some of the considerations for investment and wealth management firms, see PIMFA's response here: PIMFA-response-HMT-consultation-on-regulating-ESG-ratings-providers.pdf  and summary of the Investment Associations response here IA 'strongly opposes' including fund house ESG ratings in planned rules   - ESG Clarity



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    James Doyle
    Director, Green Finance, Investment Management
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  • 3.  RE: How regulated should the ESG ratings market be?

    Posted 07-07-2023 10:12

    Hi James, All,

    Completely agree that regulation of ESG ratings is coming.  Thought I'd make you all aware of our response to HM Treasury on their recent consultation.  A number of our Sustainability Community plus other CFAUK members helped write this response.

    Its up on our website at: https://www.cfauk.org/professionalism/advocacy/responses#gsc.tab=0

    Best Wishes,  Andy



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    Andrew Burton
    Professionalism Advisor
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  • 4.  RE: How regulated should the ESG ratings market be?

    Posted 31-08-2023 15:21

    Hi James,

    I'm thinking of hosting a roundtable at CFAUK's office to discuss this topic more and with the intention of responding to ICMA and IRSG's joint consultation on their "Draft Voluntary Code of Conduct for ESG ratings Providers & data Product Providers".  You'd be an ideal person to join.  Would you be interested?  Thinking of a meeting over sandwiches one lunchtime during week commencing 11th September.

    If you could let me know your email address I will include you in a circulation with more details.

    Best Wishes,

    Andy Burton, CFA



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    Andrew Burton
    Professionalism Advisor
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  • 5.  RE: How regulated should the ESG ratings market be?

    Posted 07-07-2023 12:05

    Hi Katy and All,

    Important issue and good questions. Some thoughts and personal opinions.

    Voluntary Codes are of conduct are prefered for a number of reasons but have challenges in winning and maintaining trust. 

    Those advocating them believe they are better at understanding the issues and shaping the rules but at the same time they are influecnce by their own self interest and subject to common behavioural biases and group think. To mitigate this the code should be developed with the input of all stakeholders even if its application is voluntary.  The observation that all stakeholders should contribute is true of both mandatory rules and voluntary codes. 

    Voluntary Codes can perhaps accomadate industry nuances better and maybe able to facilitate dynamic updating faster than a regulatory and legal fram work subject to final approval of non experts.  ESG and the metrics proposed to judge the components of both financial and non financial risks and impacts are imature and likely to evolve with use, understanding and innovation.

    Focus is on disclosure and transparency regarding both conflicts of interest and methadology  is at the heart of building a trusted sustainable finance system and the language and reliability of information supporting it.  This means any code or regulation is only as good as the actual behaviour and adherance of those signed up to it and the outcomes it generates,  Outcomes are both in objective goals and the building and maintaing of a trusted system. 

    The weakness of a vouluntary code is that it maybe seen as self serving and hence lose the trust of stakeholders.  Independent oversight and a mechanism for accountability and governance are essential, calling out and acting on failure to live upto the code or regulation is a key to maintaining trust.  Government and civil society can both play a role in this, government as it has powers of intervention civil society in that it can challenge, question and call out. 

    To be effective a voluntary code for an industry should co-operate and accept independent oversight and would be wise to co-operate with and positively engage with stakeholder and civil society and any organisations that provide oversight and challenge.  Trust is built on trustworthy behaviour, hard won and easily lost, so its in the industry's long term interest to make sure the industry as a  whole is trusted, However leniency on implementation and governence will undermine any system of control.  The ambiguity around many of the keywords in the ESG, sustainability and impact lexigon in common use mean clarity of meaning and use are needed when context and meaning are left open it is an open goal for manipulation and letting recipients of material see what they want to, an easy source of both unintended and intended greenwashing.



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    David Manuel
    Partner
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  • 6.  RE: How regulated should the ESG ratings market be?

    Posted 31-08-2023 15:22

    Hi David,

    Hope you're well.

    I'm thinking of hosting a roundtable at CFAUK's office to discuss this topic more and with the intention of responding to ICMA and IRSG's joint consultation on their "Draft Voluntary Code of Conduct for ESG ratings Providers & data Product Providers".  You'd be an ideal person to join.  Would you be interested?  Thinking of a meeting over sandwiches one lunchtime during week commencing 11th September.

    If you could let me know your email address I will include you in a circulation with more details.

    Best Wishes,

    Andy Burton, CFA



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    Andrew Burton
    Professionalism Advisor
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  • 7.  RE: How regulated should the ESG ratings market be?

    Posted 10-07-2023 15:39

    Voluntary codes of conduct are great to have, but shouldn't be solely relied upon.

    Much wider regulation is needed to help bridge the methodology gap between different providers and ensure as much standartization as possible. This will increase the trust from both investors and companies who would be able to clearly read signals on ESG matters.

    Definitely a hot topic for regulators as they are trying lay the groundwork for implementation.

    On a related note, The Monetary Authority of Singapore (MAS) has similarly proposed a code of conduct for ESG Ratings and Data Providers.

    It will establish minimum industry standards for transparency in methodologies and data sources, governance, and conflicts of interest.

    https://financefeeds.com/singapores-mas-proposes-code-of-conduct-for-esg-ratings-and-data-products/



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    Ina Yurieva Ivanova
    Associate Director
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  • 8.  RE: How regulated should the ESG ratings market be?

    Posted 13-07-2023 14:01
    Hi Everyone,


    Just a few personal thoughts on ESG ratings, if it is not too late

    I am not in favour of too much regulation

    Climate Change is a huge challenge. Consequently, innovation is highly prized

    Whatever developments emerge, they should be flexible enough to allow for innovation

    I prefer voluntary codes which can be updated quite swiftly. ICMA Green Bond Principles I think is a good example of increasing standards without stifling innovation

    I believe ESG rating agencies need to differentiate themselves from each other. It is a competitive marketplace. They need to innovate to have an edge on their competition. Clients will follow if there are good ideas, processes, etc

    All ESG rating agencies should not be the same. Otherwise they will all follow the herd and make the same mistakes

    Certainly, there should be transparency over methodologies, with good governance, Codes of conduct, etc

    Nothing is perfect. All we can do is keep moving in the right direction and constantly improve

    Innovation with constant improvement is the best way to address our huge challenges such as climate change in my opinion

    Just my personal thoughts

    Hope it helps a bit


    Chris




    Sent from my iPhone