FCA Highlights Improvement Areas for ESG Benchmarks
In September 2022, the Financial Conduct Authority (FCA) sent a portfolio letter to benchmark administrators, wherein it emphasised the potential risk of inadequate disclosures for ESG benchmarks. It believes that high-quality ESG benchmarks are critical to building trust in the ESG product market and facilitating the transition to a net-zero economy.
A preliminary review of ESG benchmarks has been completed, and the results indicate that the quality of ESG-related disclosures provided by benchmark administrators is inadequate.
A follow-up letter has been sent to administrators outlining the issues that were identified. These include insufficient detail regarding the ESG factors that are considered in benchmark methodologies, a lack of clarity and accessibility in the presentation of underlying methodologies for ESG data and rating products used in benchmarks, a failure to fully implement ESG disclosure requirements, and improper implementation of ESG benchmark methodologies, such as the use of outdated data and ratings or a failure to apply ESG exclusion criteria.
It is expected that all benchmark administrators will develop strategies to address the issues highlighted in the letter. Further efforts will be made in this area to address any potential shortcomings, and firms are expected to be able to explain their strategies if requested. If such strategies are not implemented, the full range of tools available will be used to address the issue.
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In previous statements, it was mentioned that support is provided for the regulation of ESG ratings. Collaborative efforts with the government are underway in this regard, and the government is expected to consult on the expansion of the FCA's perimeter to include ESG ratings providers in the near future. The development of a voluntary Code of Conduct for ESG data and ratings providers is also supported and encouraged.