Technology & Data

UK to Legislate ESG Ratings

Chancellor Jeremy Hunt confirmed in the 2024 Spring Budget statement that the UK government will regulate the provision of ESG ratings used in investment decisions. According to HM Treasury, a full consultation and legislative steps will follow later this year. The government consulted on a potential regulatory regime last year, having previously announced its intentions as part of the Edinburgh reforms unveiled in December 2022. A code of conduct for ESG ratings and data providers was also published last December by the International Capital Market Association and the International Regulatory Strategy Group, commissioned by the UK’s Financial Conduct Authority (FCA). “Although there are products that make direct use of ESG ratings as a basis for capital allocation, it’s the underlying data that can often be more valuable,” said Simon Jones, Head of Responsible Investment at consultancy Hymans Robertson. “Using this information, product providers have often created bespoke methodologies drawing on multiple insights and data sources to develop products.” Jones added that although the regulation of ESG ratings providers would be helpful to promote transparency and consistency, it should not be extended to those who use ESG data solely for the purposes of creating investment products. Richard Andrews, Head of ESG at KPMG in the UK, said bringing ESG ratings within the FCA’s regulatory remit would help to build trust for investors. “We can expect [it] to require firms to formalise governance structures and publish their methodologies to increase transparency and comparability. A key challenge for providers will be around ensuring quality and consistency across the wide range and sources of underlying data,” he added.

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