The UK government has announced a pivotal step in the regulation of Environmental, Social, and Governance (ESG) ratings.
According to Environmental Finance, Chancellor Rachel Reeves outlined that the forthcoming legislation, set for next year, aims to align the UK with international regulatory frameworks, particularly the European Union. This move, as detailed by the Financial Times, is designed to foster investment by enhancing the reliability of sustainable companies.
The Financial Conduct Authority (FCA) will spearhead the new regulatory regime, a response to concerns voiced by asset managers about the clarity and consistency of existing ESG ratings. According to Sacha Sadan, the FCA’s director of ESG, the forthcoming regulations will address transparency in rating methodologies and potential conflicts of interest. This follows the FCA’s participation in developing a voluntary code of conduct with the International Capital Market Association, which was introduced last December.
The legislation was first hinted at by former Chancellor Jeremy Hunt in March, with a consultation following through to June. Today’s update marks a significant advancement in defining the regulatory landscape for ESG ratings in the UK.
Farmida Bi CBE, Chair of the IRSG Council, which helped develop the voluntary code, commented on the importance of the government’s initiative: “The Government’s announcement to bring forward a regulatory regime for ESG ratings providers is welcome. Ensuring market confidence in the integrity of ESG rating products is crucial. This step will help to increase transparency and improve product quality and outcomes for rating users.”
UKSIF CEO James Alexander reflected on the industry’s journey, noting, “Today’s announcement was the product of years of work to convene the industry, including bringing in ESG ratings providers into the FCA’s regulatory perimeter. This regulation should help open the black box on these sorts of judgments, not by forcing agreement or consensus, but by shining a light on how the underlying data is gathered and how ratings are calculated.”
Simon Jones, head of responsible investment at Hymans Robertson, emphasised the need for tailored regulations that recognize the diverse applications of ESG ratings by investors. He cautioned against over-regulation that could stifle innovation in the development of investment products based on ESG data.
The new legislation promises to usher in an era of improved transparency and trust in ESG ratings, aligning the UK more closely with global standards and promoting responsible investment practices.
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