Tightening ESG Ratings Regulation to Curb Greenwashing
As environmental, social, and governance (ESG) factors become increasingly central to investment strategies, the need for reliable ESG ratings has surged. In response, regulators are taking steps to oversee and standardise the practices of ESG rating providers, addressing concerns about potential conflicts of interest and the methodologies being used.
The International Organisation of Securities Commissions (IOSCO) has called for greater scrutiny of ESG ratings. The recommendation for enhanced oversight has prompted several jurisdictions to respond. For instance, the European Union has recently taken significant steps to bring ESG rating providers under the European Securities and Markets Authority (ESMA) regulatory authority. This move aims to enhance the reliability and comparability of ESG ratings, ensuring that these assessments are both accurate and free from conflicts of interest and greenwashing.
Across the Channel, the United Kingdom is also advancing on this. Earlier this year, the Financial Conduct Authority (FCA) introduced a voluntary code of conduct for ESG ratings and data products providers. This initiative is part of a broader effort to establish the UK as a global hub for green finance. The UK government, in its updated Green Finance Strategy, had announced plans to explore the regulation of ESG rating providers, highlighting the growing recognition of the importance of oversight in this sector.
HM Treasury recently emphasized the urgency of this issue, with the Chancellor calling for a prompt response to industry consultation on a new regulatory framework for ESG rating providers. The Treasury has committed to introducing legislation in the coming year, which will aim to further solidify the UK’s position in green finance.
These developments reflect a broader trend toward increasing regulation and standardisation in the ESG space, as both investors and regulators seek to ensure that ESG ratings being used are reliable, transparent, and free from greenwashing, greenhushing, and undue influence. As the demand for ESG information continues to grow, the need for robust governance will become even more critical, making the next few years pivotal in reshaping the future of ESG and sustainability ratings and their role in global finance.
Sources: https://www.esgtoday.com/uk-to-introduce-law-to-regulate-esg-ratings-providers/
https://www.reuters.com/world/uk/britain-propose-law-next-year-regulate-esg-raters-2024-08-08/
