FCA expects increased ESG regulation

News Team, 04/07/2022

The UK Financial Conduct Authority (FCA) has published its initial feedback from the survey on ESG that it launched last year.

Funds that are ESG focused have been very popular over the past two years, but a number of green-washing allegations have prompted regulators to look much more closely at oversight of ESG claims.

The survey focused on ESG labelled debt instruments, and looked at prospectus and “use of proceeds” (UoP) bond frameworks, and the role of verifiers and second party opinion (SPO) providers.

It also covered ESG data and ratings providers.

Concerns raised included poor governance controls, conflicts of interest, lack of transparency and high data costs.

The regulator concluded that there is a “clear rationale” for regulatory oversight of ESG data and ratings providers. It also stressed the need for a globally consistent regulatory approach, a proposal that the International Organisation of Securities Commissions has been working towards.

Policy Actions

While stressing that work on the subject is on-going, the FCA issued four policy actions arising from this survey.

First it reminded issuers, advisors and market participants that advertisements and prospectuses for ESG bonds must not be misleading or inaccurate, and that enforcement action is possible where this is not adhered to.

It encouraged the voluntary adoption of industry standards, such as the International Capital Market Association (ICMA) ESG guidelines, for issuers and advisors of ESG labelled debt instruments. Closer regulatory oversight remains a matter under consideration.

With regards verifiers and SPO providers, it again proposed voluntary compliance with ICMA guidelines. Once again, this is an area where further oversight is being considered, in coordination with the Financial Reporting Council.

Finally, it stated that it was working with the UK Treasury to bring ESG data and rating providers within the regulatory framework. The form and extent of this regulatory oversight is to be determined.

For the latter action point the FCA acknowledged that it may take some time to agree the expansion of its remit, and, once again, encouraged a voluntary alignment with industry standards and an anticipated industry code of conduct to be developed with the Treasury and market participants.

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