The UK is considering placing ESG data vendors under the regulation of its financial watchdog in a bid to eliminate greenwashing and to make impact investing more transparent.
The government said the Financial Conduct Authority may be asked to bring the companies under its purview because it was important to ensure the integrity of a vital input into the growing sustainable investing industry.
“It is important that providers deliver ESG data and ratings transparently, and that they have strong governance and management of conflicts of interests,” the government wrote in a paper entitled Greening Finance: A Roadmap to Sustainable Investing. “The government is therefore considering bringing these firms into the scope of FCA authorisation and regulation.”
Authorities are concerned that gaps in the ESG data record and differing ratings on financial products made it difficult for investors to make informed decisions on where to allocate capital. With the market for such data in the UK forecast by Optimas to grow to $1 billion by the end of the year, it was crucial that the industry was properly managed, the report stated.
Issued in tandem with Prime Minister Boris Johnson’s announcements of plans for the UK to reach net-zero by 2050, the report was unveiled two weeks before Britain hosts the COP26 UN climate summit in Glasgow. Organisers of the event chaired by business minister Alok Sharma have been criticised for failing to secure substantiated pledges from world leaders on their own plans to arrest global warming.
Data management provider NeoXam said the consideration of FCA oversight reflected the growing importance of ESG data to financial markets.
“All financial market participants are facing challenges related to sustainability, including how to deal with access to increasing amounts of ESG data,” NeoXam Head of Regulation Kifaya Belkaaloul told ESG Insight.
“The UK government considering bringing ESG data and ratings firms under FCA supervision reflects the significant industry shift towards ESG investing, and goes to show that it has never been more important for ESG scorings to be fully integrated and accessible in the same way as risk or performance indicators are currently.”
In a foreword to the report, Chancellor of the Exchequer Rishi Sunak said the smooth running of green markets was crucial to the UK’s future prosperity and to safeguarding the environment.
“Ensuring the financial sector is equipped to play its part is vital,” Sunak wrote. “Aligning the financial system with a sustainable future will bring real benefits for the environment and society. It is an opportunity to boost economic growth, create jobs, and level up the UK regions.”
In another measure to prevent greenwashing the government said also it would introduce its own Green Taxonomy to “clearly set out the criteria which specific economic activities must meet to be considered environmentally sustainable and therefore ‘Taxonomy-aligned’.”
It said the UK would align its new framework with that of the European Union’s Sustainable Finance Disclosures Regulation (SFDR).
The move appears to confirm the expectations of industry leaders. In a recent A-Team webinar, Dani Williams, Principal Consultant ESG Governance at the ACA Group said she forecast the UK would adopt SFDR or “SFDR-like” regulations.“We’re seeing a lot of firms over here getting massive pressure to adopt the SFDR requirements in Europe, and having multiple regulatory regimes that are all similar but different will cause even more chaos in the market,” Williams said.
“Despite all of SFDR’s flaws having some sort of consistency of approach makes it a lot easier for firms to adopt it wherever they are.”
The government will issue more details on its ESG data plans in the new year.