FSA has called on ESG ratings and data providers to endorse voluntary code.
Japan’s Financial Services Agency (FSA) has finalised a new code of conduct for ESG ratings and data providers. The code of conduct was proposed in July, following a November 2021 report from International Organization of Securities Commissions (IOSCO) which called for tighter oversight of ESG ratings and data product providers.
The draft code was based on recommendations from an expert panel on sustainable finance established by the Japanese regulator in February. The FSA said it received 209 comments on the draft code of conduct from 45 individuals and entities. The FSA has published a response paper, and has finalised a code of conduct which is designed to be a voluntary code on a “comply or explain” basis.
The code asks ESG data providers operating in Japan to adopt six principles. These six principles cover the quality of ESG ratings and data being provided, and the basic procedures that should be established for this purpose, the professional human resources available to ensure the quality of the ratings and data provision services provided, and the development of professional skills and the policies that should be established to ensure independent decision-making and that conflicts of interest are appropriately addressed.
It also covers the transparency and disclosures that are provided regarding the approaches to providing services and methodologies used in ESG ratings, the policies and procedures that should be established to protect non-public information obtained in the course of business and the ways in which information is gathered from companies, and the transparency provided to companies about where the information is sourced.
The FSA has now called on ESG ratings and data providers to endorse the code of conduct, publish it on their websites, and notify the regulator. The FSA will publish the status of endorsement of the code by June 2023, and the status of endorsement regarding data provision by June 2024. FTSE Russell, MSCI, Sustainalytics, Moody’s ESG and ISS ESG have previously spoken in favour of Japan’s proposed code of conduct.
Earlier this year Satoshi Ikeda, Japan FSA’s Chief Sustainable Finance Officer, told ESG Investor that: “We’ve been trying to lead industry and financial sector discussions on [climate change] since the Paris Climate Accord was signed [in 2015]. We have been focused on how the financial markets in Japan can mobilise capital towards managing climate risk, and we have been trying to establish a certain framework and infrastructure to do that.”
Ikeda is also Co-chair of the IOSCO workstream that developed the recommendations. In line with these, Ikeda said Japan’s code was designed to improve the transparency of ratings and data providers’ methodologies, ensure procedures for managing conflicts of interest are appropriate, and improve communication channels between providers and the entities covered without undermining their impartiality.