By Philip Morgan and Zainab Kuku
Responding to encouragement from both the FCA and IOSCO, HM Treasury has proposed regulating ESG ratings providers in a consultation paper dated 30 March 2023. It primarily aims to improve the transparency of the methodologies and governance objectives adopted by ESG ratings providers, as well as to mitigate risks arising from conflicts of interest where the rating provider also provides other services to the rated entity.
The core policy proposal is that both UK and overseas firms engaged in the direct provision of an assessment of ESG factors to a user in the UK, where the assessment is used in relation to regulated investments (eg shares, debt instruments or units in funds), will need to be FCA authorised unless an exclusion applies.
The proposed exclusions include not-for profit entities providing ESG ratings, and asset management firms that create their own internal ESG ratings or assessments to inform investment decisions as long as the ESG ratings are not shared externally. An exclusion for smaller providers of ESG ratings is also under consideration.
A notable feature of the proposal is its broad scope, capturing any evaluation of the characteristics of an entity or product as related to any environmental, social, or governance matter, irrespective of whether such evaluation is described as, for example, a “rating” “score” or “mark”. Following the FCA’s critical review of the quality of ESG Benchmarks (see our blog here), this approach may be welcomed by users who rely on a wide range of ESG-related assessments, including asset managers. However, over-inclusivity is also a risk that is clearly on the Government’s mind – for example, they are considering exclusions in relation to investment research products which may incorporate ESG considerations, and consulting services, even where these relate to ESG matters. The consultation closes on 30 June 2023.