On July 5, 2023, The UK’s International Regulatory Strategy group published a Consultation Draft Code of Conduct for ESG Raters and Data Product Providers (the Code of Conduct). An article from Responsible Investor (Subscription Required) discusses the finer points of the consultation. Here are some key takeaways:
- The Code of Conduct is completely voluntary as proposed:
“Compliance with the code of conduct is strictly voluntary, and providers have the added flexibility of deciding how best ‘to meet the expectations… in a manner aligned to their own business model and structure’. It additionally does not ‘prescribe a singular approach as to how the Principles should be embedded within a provider’s organization.’”
- The Code of Conduct targets disclosure around compensation agreements:
“To demonstrate compliance, providers could consider disclosing ‘the general nature of the compensation arrangement or any other business or financial relationships that exist’ with clients, as a way to address conflicts of interest (COI) that may arise.”
- Disclosures under the Code of Conduct would shed light on opaque aspects of ESG ratings:
“The code encourages providers to use publicly [sic] disclosed sources where possible and explain how estimations are derived when actual data is not available… Providers are also asked to describe their methodologies and assessment criteria, and to ensure their consistent application”
What this Means
Regulators globally are taking more interest in ESG raters including draft legislation in the EU. Japan published a similarly voluntary principles-based code for conduct for ESG providers which is now gaining some traction among raters. In addition to the voluntary Code of Conduct in the UK, the UK’s Treasury is working on a mandatory regulatory framework for ESG raters.
Voluntary standards may not seem serious due to their “opt-in” nature, but as we’ve seen before with emissions reporting, standards often begin as voluntary and later become mandatory. It is interesting that this Code of Conduct requests disclosures about providers’ methodologies as these are often proprietary black boxes and are treated as closely guarded trade secrets.
To learn more about ESG ratings check out our Podcast: The ABC’s of ESG Episode 10: ESG Ratings as well as our Webcast: Improving Your ESG Score.
