As financial services firms integrate ESG into their activities and expand ESG-focused products, they are increasingly reliant on third party ESG data and ratings services. ESG providers are now coming under increasing scrutiny due to major concerns over the reliability of their assessments.
The clamour for greater authenticity is palpable and it is growing.
The FCA recently expressed their support for introducing regulatory oversight of certain ESG data and ratings providers. The regulator considers that this would support greater transparency and trust in the market for ESG data and ratings services.
If the Treasury extends their regulatory perimeter, the FCA is committed to taking the necessary steps to develop and consult on a proportionate and effective regulatory regime, with a focus on outcomes in areas including, transparency, good governance, management of conflicts of interest, and systems and controls.
Whilst the Government considers this, the FCA has worked to convene, support and encourage industry participants to develop and follow a voluntary Code of Conduct.
The International Capital Market Association (ICMA) and the International Regulatory Group (IRSG) are to convene an independent group to develop the Code co-chaired by M&G, Moody’s, London Stock Exchange Group, and a magic circle law firm.
The demand for ESG information and its importance to the industry has increased immensely in recent years and remains on an upward trajectory.
A recent survey found that 88 percent of investment professionals use third-party ESG ratings as a part of their investment process, with 92 percent expecting to do in future.
The prodigious and increasing appetite for ESG information has, in many ways, outstripped the ability of suppliers to provide the depth, detail, and accuracy of data required.
This could, in part, be due to the vast number of factors that arguably fall under the heading of ESG, the issues with measuring ESG factors, and the challenge of determining their impact.
Studies have found low correlations across ESG ratings providers.
The current lack of coherence and consistency in ESG data is frequently baffling to the point of being meaningless and risks bringing ESG data and ratings providers into serous disrepute. ESG itself risks being tainted by association.
The growth in importance of ESG ratings to the asset management business is shown by the flow of funds into ESG-labelled products. Bank of America calculates that over $200 billion was invested in ESG bond funds between 2019 and 2022.
The prospect of the regulatory oversight of certain ESG data and ratings services providers should encourage the FS and other industries to re-examine their ESG initiatives to prepare for more transparency.
Demonstrating to ESG data and ratings providers that their organisation merits that essential top ESG rating looks set to become more challenging for some, but increased authenticity on ESG has to be in the best interests of all.
In the US, the SEC has warned ratings agencies that they are developing new rules to encourage transparency and consistency to help combat “greenwashing”.
Contact

Raymond Silverstein
Partner
raymond.silverstein@brownejacobson.com
+44 (0)207 337 1021
You may be interested in...
Published Article
ClientEarth claim may expand scope of directors' duties
Legal Update - ESG in 3D
ESG in 3D - March 2023 (Edition 3)
Press Release
Apiary Capital backed Radiant Financial Group advised by Browne Jacobson on new debt facility to fund growth strategy
Legal Update - ESG in 3D
ESG in 3D - March 2023 (Edition 2)
Online Event
Wellbeing and financial considerations – practical solutions for challenging times
Legal Update
Political risk update
Legal Update - ESG in 3D
ESG in 3D - March 2023 (Edition 1)
Legal Update
“Being on display in a zoo” is oppressive for luxury flat owners as the Tate Modern is found to be liable in nuisance
Legal Update
Browne Jacobson collaborates with the University of Nottingham on EDI survey in the UK insurance market
On-Demand
Future of Care - Retirement Living webinar
Legal Update
Court of Appeal considers ‘proximate cause’ for Pollution or Contamination exclusion in All Risks policy
Legal Update
Court of Appeal considers law and jurisdiction clause within suite of multi-risk policies across Gulf jurisdictions
Legal Update
Green Leases for the NHS
Legal Update
California bomb cyclone set to ‘to exceed $1bn’ in storm damage costs
Legal Update
Systemic Event Risks: the need for a customer-centric approach to policy drafting
Legal Update
The rising number of cyber-attacks
Legal Update
Out of this world insurance – proposed changes to orbital liability and insurance
Legal Update
The continued threat of piracy in Southeast Asian waters
Legal Update
(Another) case on the importance of clear drafting
Legal Update - The Word
The Word, January 2023
On-Demand
Environmental, social and governance (ESG) in the context of retirement living
Press Release
Insurance claims frequency and severity set to increase in 2023, according to leading law firm Browne Jacobson
Legal Update
Insurance Insights 2023
Press Release
Browne Jacobson's London FinTech team celebrate new Chambers 2023 rankings
Legal Update
Banking Transaction Updates - January 2023
Press Release
Manchester dealmakers advise Maven Capital Partners on £1m investment in fintech disruptor Nivo Solutions
Published Article
Consumer duty part 3 - 'The drill-down' into the 'cross-cutting' rules
Legal Update
Code of Conduct for ESG data and ratings providers – bridging the authenticity gap
Legal Update - ESG in 3D
ESG in 3D, December 2022
Legal Update
COP15: The most important unknown summit?
Legal Update
Long live king coal?
Legal Update
Code of Conduct for ESG data and ratings providers
Legal Update
All the pieces of the conduct puzzle: Governance, culture, D&I, innovation
Legal Update
Voluntary offset markets for carbon – a bad atmosphere?
Article
‘Decentralised and autonomous’ – evolution or misunderstanding of unincorporated association law?
Published Article
Starling Bank employment tribunal
The outcome of the Employment Tribunal claim brought by Gulnaz Raja against Starling Bank Limited (1) (Starling), and Matthew Newman (2) was reported last month.