DRWG consults on ESG code of conduct

On 5 July 2023, the ESG Data and Ratings Code of Conduct Working Group (DRWG) published a consultation on a draft voluntary code of conduct for ESG ratings and data product providers. The DRWG was, supported in this work by the International Regulatory Strategy Group (IRSG) and the International Capital Market Association (ICMA).

The draft code of conduct is intended to enhance consistency, transparency and accountability in the financial services industry.

What’s the background?

As reported at the time, in November 2022, the FCA commissioned the IRSG and ICMA to convene an industry-led working group (the DRWG), and to act as the Secretariat for the development of a voluntary code of conduct for ESG Data and Ratings Providers.
The FCA wanted the code to be “internationally consistent” by taking into account developments in other jurisdictions (for example, ESMA’s call for evidence on ESG rating providers that we reported on here) as well as recommendations from IOSCO. (Our summary of the IOSCO recommendations can be found here.

What’s happened since?

In line with the FCA’s wishes, the DRWG has engaged with standard-setters in other jurisdictions to ensure international consistency. In a press release published alongside the consultation, the DRWG stated that it had done this primarily through close alignment with the IOSCO recommendations.

What does the Code of Conduct include?

The code aims to ensure market confidence in the integrity of ESG ratings and data products through enhanced systems, processes and controls. To this end the draft code sets out a number of best practice principles:

• Good governance - ESG ratings and data products providers ensure appropriate governance arrangements are in place including transparency and conflict management.
• Systems and controls - implementing written policies and procedures ensure a high quality of products, consistency and effective engagement practices.
• Conflicts of interest - ESG ratings and data products providers manage activities that may compromise the independence and objectivity of ratings and operations.
• Transparency - establishing adequate levels of public disclosure and transparency as a priority for ESG ratings and data products, including methodologies and processes.

What’s been the response?

The FCA has welcomed the consultation, indicating that it would play an important role in raising standards in the short-term, as well as continuing to apply to any firms that fall outside the scope of potential future regulation. However, the FCA cautioned that if agreed, introducing regulation in this area would take time.

What’s next?

The consultation will close to responses on 5 October 2023 and DRWG intends to publish the final code at the end of 2023. DRWG may also publish a feedback statement reflecting the key issues raised by stakeholders.