EUROPE: UK’s FCA Issues Stern Warning to ESG Benchmark Administrators for Lack of Rigour
By Zainab Kuku
The FCA did not hold back in its most recent comments to ESG benchmark administrators, in an indication of its increasingly adversarial approach to ‘greenwashing’. It described the quality of disclosures of ESG factors considered in benchmark methodologies as ‘poor’, and aimed clear warning shots at administrators who fail to comply with the FCA’s feedback.
Following its preliminary sample review on ESG benchmarks, the FCA highlighted key concerns in its 20 March 2023 ‘Dear CEO’ letter:
- Insufficient disclosure: benchmark administrators do not provide sufficient details and descriptions of the ESG factors considered in their benchmark methodologies;
- Incomplete implementation: the disclosure requirements introduced by the Low Carbon Benchmarks Regulation are not being fully implemented and most disclosures omit key information set out in prescribed ESG templates; and
- Inaccurate calculations: in several instances, benchmarks had been miscalculated due to incorrect application of ESG factors.
The FCA’s stern warning should not go unnoticed. In particular, asset managers and investors should consider reducing their reliance upon, or at least increasing their scrutiny of, ESG benchmarks until standards improve. ESG benchmark administrators have been warned before: in an 8 September 2022 Portfolio letter, the FCA told ESG benchmark administrators to prepare good quality disclosure through accurate benchmark statements and methodologies. Benchmark administrators should accordingly expect the FCA to deploy formal supervisory tools and enforcement action if they do not pay due regard to the FCA’s feedback on this occasion.