FCA Warns on “Poor” ESG Benchmarks

The UK’s Financial Conduct Authority (FCA) has followed up a September 2022 letter to benchmark administrators highlighting the risk of poor disclosures around ESG benchmarks, with the result of a preliminary review, which found the overall quality of ESG-related disclosures made by benchmark administrations was indeed “poor”.

“High quality ESG benchmarks are important to support trust in the market for ESG products and the transition to a net zero economy,” the UK regulator says in a release. “We have sent a further letter to administrators outlining the issues identified.”

The issues raised by the FCA include a lack of detail on the ESG factors considered in benchmark methodologies, as well as administrators not ensuring that the underlying methodologies for ESG data and ratings products used in benchmarks are accessible, clearly presented and explained to users.

The FCA also found administrators were not fully implementing ESG disclosure requirements and they were also failing to implement their ESG benchmarks’ methodologies correctly – for example, using outdated data and ratings or failing to apply ESG exclusion criteria.

“We expect all benchmark administrators to have strategies to address the issues identified in this letter,” the FCA states. “We will be doing more work in this area to address the potential failings, and expect firms to be able to explain these strategies on request. We will use the full range of our tools where this does not happen.

“We have previously said that we support regulation of ESG ratings,” it adds. “We are working closely with government on this, who are expected to shortly consult on whether and how to extend the FCA’s perimeter to include ESG ratings providers. We also support and encourage the development of a voluntary Code of Conduct for ESG data and ratings providers.”