ESG, sustainability and responsible business

FCA announces plan to develop a code of conduct for ESG data and ratings providers in UK

Published on 10th Jan 2023

Regulator's growing focus on ESG continues with concerns over the subjective nature of sustainability data and greenwashing risk

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On 22 November 2022, the Financial Conduct Authority (FCA) announced the formation of a working group to develop a voluntary code of conduct in order to address growing concerns around the labelling and provision of environmental, social and governance (ESG) benchmarks.

While the FCA does not currently regulate ESG data and ratings providers, it has previously supported the extension of its regulatory perimeter in this way. In a paper published in June, it noted that it saw a "clear rationale for regulatory oversight of certain ESG data and rating providers" with the aim of ensuring an effective, trusted and transparent market.

Working group to develop code of conduct

The working group aims to meet for the first time this year and the co-chairs will include M&G, Moody’s and the London Stock Exchange Group. Other members of the group will include investors, ESG data and ratings providers, and rated entities. The International Regulatory Strategy Group and the International Capital Market Association will jointly take on the role of secretariat. In the chancellor's autumn statement made on 9 December 2022, it was additionally announced that HM Treasury will also join the working group as an observer.

The FCA aims for the code of conduct to be "internationally consistent" and plans to take into account developments in other jurisdictions, such as Japan and the EU, as well as recommendations from the International Organization of Securities Commissions (IOSCO).

What are the issues plaguing ESG?

On 8 September 2022, the FCA published a "Dear CEO" letter on the topic of operating financial benchmarks in which they spoke about their increasing concern over the management and use of ESG benchmarks, in particular given the subjective nature of ESG factors, and the way in which this data is incorporated into the benchmarking methodologies.

As a rapidly growing and relatively new sector, the lack of regulatory-approved definitions as to what constitutes an ESG or sustainable fund, means that inconsistences have grown between current ESG offerings.

As part of the FCA's growing focus on ESG, it has placed substantial emphasis on "trust" and "transparency" within the market. In its efforts to achieve this, the FCA is currently hosting a consultation on Sustainable Disclosure Requirements (SDR) and investment labels (CP22/20), which is scheduled to close on 25 January 2023, with the primary aim of "clamping down on greenwashing" – that is, exaggerated or misleading sustainability-related claims about investment products. The consultation seeks to address the FCA's aims to introduce rules on sustainable investment labelling, consumer-facing product-level disclosures, naming and marketing, and distribution (for more, see our Insight)

A fundamental principle underscoring this push towards greater regulatory oversight is the idea that "consumers must be able to trust sustainable investment products". The FCA has itself noted in its consultation that where there is a lack of trust, consumers will shy away from the market, slowing the flow of capital to investments that could allow us to build a more sustainable future.

Impact of regulatory change

There is no doubt that regulators are getting serious about ESG, including the risks presented by greenwashing (for more, see our Insight).

Any changes to the regulatory landscape, when they come, will hopefully provide welcome clarity – but they will have far-reaching consequences for companies involved with ESG and firms will need to drive the changes within their organisations themselves. Firms who ignore the impact on their businesses may face regulatory scrutiny, investor action or reputational damage.

For example, firms will need to decide if they want to apply sustainable investment labels to their products, and how they choose to name and market their offerings, and must take care in assessing whether their products truly meet the criteria for sustainability in order to avoid claims of greenwashing.

Mandatory disclosure

The implementation of the ESG Sourcebook and recent rule changes have meant that the disclosure requirements of the Task Force on Climate-Related Financial Disclosures (TCFD) have been expanded on a comply or explain basis, with mandatory TCFD-aligned disclosure requirements introduced for listed issuers, as well as regulated firms (asset managers and FCA-regulated asset owners). The regulator has signalled its intent to further expand on these in the future. Additionally, the International Sustainability Standards Board (ISSB) are developing global sustainability reporting standards, which build on the TCFD framework. They are yet to be finalised, but are expected to be adopted in the UK when they are and will form a core component of the SDR framework.

Firms which make mandatory public climate change disclosures may face challenges as a result of problematic ESG data from third parties.

Investment funds

Alongside the drawing up of a new code of conduct, the SDR consultation has put forward proposals for rules on sustainable investment labelling, as well as tighter rules around the naming and marketing of products, with the improper use of certain sustainable terms prohibited. The UK government is also developing a UK Green taxonomy which will set down a common framework for investments that can be defined as environmentally sustainable (taking the scientific metrics in the EU Green Taxonomy as its basis). A consultation paper is expected to be published in due course, following which the FCA will consider how it might update the SDR to include disclosures relating to the Taxonomy. The government further expects that, as SDR information becomes available to investors, the UK's pensions and investment sectors will have the data to act as effective and responsible stewards of capital and we will therefore see more firms signing up to the UK Stewardship Code.

It follows that investment funds offering "green" funds, but whose underlying assets are not entirely "green", may come under fire under these new proposals for the inaccuracy or misstatement of ESG ratings.


Certain categories of individuals may also find themselves in the hot seat with regard to ESG matters. Financial advisers seeking to advise clients on ethical investing, and relying on ESG benchmarks in order to do so, may face complaints or legal action should the advice be inaccurate as a result of problematic ESG data.

Senior managers may be held personally accountable in circumstances where they have failed to exercise sufficient oversight over ESG-related breaches. This tracks with the expectation that responsibility for identifying and managing financial risks from climate change should be allocated to the relevant Senior Management Function.

Osborne Clarke comment

There are many steps firms should take to ensure they are running ESG-sensitive organisations, especially as the regulatory perimeter becomes more defined.

Firms should consider their horizon scanning, record keeping and training, among other things, in order to ensure they continue to remain up-to-date with developments.

If you would like to discuss any of the issues raised in this Insight, please get in touch with your usual Osborne Clarke contact, or one of the experts listed below.

This Insight was produced with the assistance of Gabrielle Li, Trainee Solicitor



* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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